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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A stock is currently priced at $53.87 and the futures on the stock that expire in six months have a price of $55.94. The risk-free rate is 5 percent and the stock is not expected to pay a dividend. Is there an arbitrage opportunity here? How would you exploit it? What is the arbitrage opportunity per share of stock?
Suppose a stock, not paying any dividend, is currently trading at $50. The annual volatility of its price is 31.55%. This implies that in a one-period binomial tree model the stock price will either be $62.5 or $40 in six months. The annual interest rate is 5%. Consider a European call option with a strike price of $50 and maturity in six months. In the one-period binomial tree model, what's the fair value of the call?
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