The shares of Echo Corporation are currently selling for $125 a share. The shares are expected to go up by 25% in each of the following two months (Month 1 and Month 2). Echo Corp. is not expected to pay any dividend over the next two months. The risk free rate is .25% per month. We are interested in using the binomial moddel to calculate the price of a European put option on Echo's shares, with an exercise price of $130. We will assume a recombining binomial tree. What is the down factor
The shares of Echo Corporation are currently selling for $125 a share. The shares are expected to go up by 25% in each of the following two months (Month 1 and Month 2). Echo Corp. is not expected to pay any dividend over the next two months. The risk free rate is .25% per month. We are interested in using the binomial moddel to calculate the price of a European put option on Echo's shares, with an exercise price of $130. We will assume a recombining binomial tree. What is the down factor
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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The shares of Echo Corporation are currently selling for $125 a share. The shares are expected to go up by 25% in each of the following two months (Month 1 and Month 2). Echo Corp. is not expected to pay any dividend over the next two months. The risk free rate is .25% per month.
We are interested in using the binomial moddel to calculate the price of a European put option on Echo's shares, with an exercise price of $130. We will assume a recombining binomial tree.
What is the down factor
Transcribed Image Text:The formula to calculate the discount factor (DF) is as follows:
DF =
1
(1+r)"
Where,
DF: Discount factor
r: Discount rate
n: No. of years
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