The net present value .

Question

Use the binomial method to determine the value of an American Put option at time t = 0. The option expires at time t = T = 1/2 and has exercise price E = 55. The current value of the underlying is S(0) = 50 with the underlying paying continuous dividends at the rate D = 0.05. The interest rate is r = 0.3. Use a time step of St = 1/6. Consider the case of p = 1/2 and suppose the volatility is σ = 0.3. Perform all calculations using a minimum of 4 decimal places of accuracy. =

Answer 1

Question

Chapter 10, Problem 4P

a)

Summary Introduction

To determine: The net present value.

b)

Summary Introduction

To determine: whether the project is acceptable or not.

c)

Summary Introduction

To determine: The meaning of the net present value figure.

d)

Summary Introduction

To determine: The internal rate of return.

e)

Summary Introduction

To determine: The reinvested rate assumed.

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Use the binomial method to determine the value of an American Put option at time t = 0. The option expires at time t = T = 1/2 and has exercise price E = 55. The current value of the underlying is S(0) = 50 with the underlying paying continuous dividends at the rate D = 0.05. The interest rate is r = 0.3. Use a time step of St = 1/6. Consider the case of p = 1/2 and suppose the volatility is σ = 0.3. Perform all calculations using a minimum of 4 decimal places of accuracy. =

Consider a European chooser option with exercise price E₁ and expiry date T₁ where the relevant put and call options, which depend on the value of the same underlying asset S, have the same exercise price E2 and expiry date T₂. Determine, in terms of other elementary options, the value of the chooser option for the special case when T₁ = T2. Clearly define all notation that you use.

The continuous conditional probability density function pc(S, t; S', t') for a risk neutral lognormal random walk is given by Pc(S, t; S', t') = 1 σS'√2π(t' - t) - (log(S/S) (ro²)(t − t)] exp 202 (t't) In the binomial method, the value of the underlying is Sm at time step môt and the value of the underlying at time step (m + 1)St is Sm+1. For this case evaluate Ec[(Sm+1)k|Sm] = [°° (S')*pc(S™, mdt; S', (m + 1)8t)dS' showing all steps, where k is a positive integer with k ≥ 1. You may assume that 1 e (x-n)2 2s2dx = 1 for all real numbers n and s with s > 0.

Answer 2

Question

Chapter 10, Problem 4P

a)

Summary Introduction

To determine: The net present value.

b)

Summary Introduction

To determine: whether the project is acceptable or not.

c)

Summary Introduction

To determine: The meaning of the net present value figure.

d)

Summary Introduction

To determine: The internal rate of return.

e)

Summary Introduction

To determine: The reinvested rate assumed.

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Answer 3

Question

Chapter 10, Problem 4P

a)

Summary Introduction

To determine: The net present value.

b)

Summary Introduction

To determine: whether the project is acceptable or not.

c)

Summary Introduction

To determine: The meaning of the net present value figure.

d)

Summary Introduction

To determine: The internal rate of return.

e)

Summary Introduction

To determine: The reinvested rate assumed.

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Answer 4

Question

Chapter 10, Problem 4P

a)

Summary Introduction

To determine: The net present value.

b)

Summary Introduction

To determine: whether the project is acceptable or not.

c)

Summary Introduction

To determine: The meaning of the net present value figure.

d)

Summary Introduction

To determine: The internal rate of return.

e)

Summary Introduction

To determine: The reinvested rate assumed.

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Answer 5

Chapter 10, Problem 4P

a)

Summary Introduction

To determine: The net present value.

b)

Summary Introduction

To determine: whether the project is acceptable or not.

c)

Summary Introduction

To determine: The meaning of the net present value figure.

d)

Summary Introduction

To determine: The internal rate of return.

e)

Summary Introduction

To determine: The reinvested rate assumed.

Answer 6

Chapter 10, Problem 4P

a)

Summary Introduction

To determine: The net present value.

Answer 7

Chapter 10, Problem 4P

a)

Summary Introduction

To determine: The net present value.

Answer 8

b)

Summary Introduction

To determine: whether the project is acceptable or not.

Answer 9

b)

Summary Introduction

To determine: whether the project is acceptable or not.

Answer 10

c)

Summary Introduction

To determine: The meaning of the net present value figure.

Answer 11

c)

Summary Introduction

To determine: The meaning of the net present value figure.

Answer 12

d)

Summary Introduction

To determine: The internal rate of return.

Answer 13

d)

Summary Introduction

To determine: The internal rate of return.

Answer 14

e)

Summary Introduction

To determine: The reinvested rate assumed.

Answer 15

e)

Summary Introduction

To determine: The reinvested rate assumed.

Answer 16

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Ch. 10.A - Prob. 1P Ch. 10.A - Prob. 2P Ch. 10.A - Prob. 3P Ch. 10.A - Prob. 4P Ch. 10 - Prob. 1QTD Ch. 10 - Prob. 2QTD Ch. 10 - Prob. 3QTD Ch. 10 - Prob. 4QTD Ch. 10 - Prob. 5QTD Ch. 10 - Prob. 6QTD

The net present value .

Solution Summary: The author explains how to determine the net present value, the internal rate of return, and the reinvested rate.

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To determine: The net present value.

To determine: whether the project is acceptable or not.

To determine: The meaning of the net present value figure.

To determine: The internal rate of return.

To determine: The reinvested rate assumed.

Chapter 10 Solutions