We want to price a European call option: \phi (S(T)) = max{0, K-S(T)} on a risky asset whose price at the end of month t is S(t) and which, in one month, can go up by 10% or go down by 15%. The monthly interest rate is 0% charged at the end of the month; T is the exercise month, exercised on the last day of the month and K is the strike price. Assuming that S(0) = 60, K = 65, and the contract is entered at the first of the month. For the call option, draw out the binary tree when T = 3 and a 3% dividend is paid on the price of the asset every two periods;
We want to price a European call option: \phi (S(T)) = max{0, K-S(T)} on a risky asset whose price at the end of month t is S(t) and which, in one month, can go up by 10% or go down by 15%. The monthly interest rate is 0% charged at the end of the month; T is the exercise month, exercised on the last day of the month and K is the strike price. Assuming that S(0) = 60, K = 65, and the contract is entered at the first of the month. For the call option, draw out the binary tree when T = 3 and a 3% dividend is paid on the price of the asset every two periods;
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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Transcribed Image Text:We want to price a European call option: \phi (S(T))
max{0, K-S(T)} on a risky asset whose price at the
end of month t is S(t) and which, in one month, can go
up by 10% or go down by 15%. The monthly interest
rate is 0% charged at the end of the month; T is the
exercise month, exercised on the last day of the month
and K is the strike price. Assuming that S(0) = 60, K
= 65, and the contract is entered at the first of the
month. For the call option, draw out the binary tree
when T = 3 and a 3% dividend is paid on the price of
the asset every two periods;
11
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