You use the standard binomial model and the following information to construct a one-period binomial tree for modeling the price movements of a nondividend-paying stock. (The tree is sometimes called a forward tree.) • The period is six months. The initial stock price is $75. The stock's volatility is 25%. • The continuously compounded risk-free interest rate is 8%. At the beginning of the period, an investor owns an American put option on the stock. The option expires at the end of the period. Determine the smallest integer-valued strike price for which an investor will exercise the put option at the beginning of the period. A) 85 B) 86 OC) 87 D) 88 E) 89

You use the standard binomial model and the following information to construct a one-period binomial tree for modeling the price movements of a nondividend-paying stock. (The tree is sometimes called a forward tree.) • The period is six months. The initial stock price is $75. The stock's volatility is 25%. • The continuously compounded risk-free interest rate is 8%. At the beginning of the period, an investor owns an American put option on the stock. The option expires at the end of the period. Determine the smallest integer-valued strike price for which an investor will exercise the put option at the beginning of the period. A) 85 B) 86 OC) 87 D) 88 E) 89

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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For a two-period binomial model, you are given: Each period is one year. The current price for a non dividend-paying stock is 20. u = 1.2840, where u is one plus the rate of capital gain on the stock per period if the stock price goes up. d = 0.8607, where d is one plus the rate of capital loss on the stock per period if the stock price goes down. The continuously compounded risk-free interest rate is 5%. Calculate the price of an American call option on the stock with a strike price of 22.
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Am. 322.
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