Question

# 1. Consider a stock which trades for \$50 (S0 = 50). Consider also a European call...

1. Consider a stock which trades for \$50 (S0 = 50). Consider also a European call option with an exercise price of \$50 which expires in one year. The risk free rate is 5% cc. Suppose that you calculate the risk-neutral probability of an upward move to be 0.5064.    What is the fair price of the option, based on a two-period binomial model?   Choose the closest answer.

A)5.28

B)5.84

C)6.45

D)13.05

2. Consider a stock which trades for \$50 (S0 = 50). Consider also a European put option with an exercise price of \$50 which expires in one year. The risk free rate is 5% cc. Suppose that you calculate the risk-neutral probability of an upward move to be 0.5064. What is the fair price of the option, based on a two-period binomial model?   Choose the closest answer.

A)4.01

B)4.60

C)5.28

D)5.84

 Current price S 50 European call option Exercise price 50 Time 1year Probablity of upward movement u= 0.5064 Find fair price of the option - Exercise price - X - 50 pi 0.5064 two period binomial - 1/2 0.5 years 1.5064 S= 50 At the end of 2 years 12.82205 C 6.493085 6.183891 1.05 P 6.328963 6.027584 1.05

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