Question

You are about to price a call option that has a strike price of $30 and...

You are about to price a call option that has a strike price of $30 and a maturity of 9 months. You know the current risk-free rate for all periods up to a year is 4.95% with continuous compounding, the current stock price is $28.75, and the stocks volatility is 25%. Use CRR approach for u & d when needed. What is the risk-neutral probability of the stock price moving up in a 30-step tree? a. .4489 b. .4745 c. .5058 d. .5328 e. .9684

the answer is C but how

Homework Answers

Answer #1

I have answered the question below

Please up vote for the same and thanks!!!

Do reach out in the comments for any queries

Answer:

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Suppose that stock price moves up by 5% (u=1.05) and d=1/u. The current stock price is...
Suppose that stock price moves up by 5% (u=1.05) and d=1/u. The current stock price is $50. Dividend is zero. Compute the current value of a European call option with the strike price of $51 in 3 months using both replicating portfolio valuation method and the risk neutral valuation method. The risk free rate is APR 5% with continuous compounding (or, 5% per annum)1.  Draw the dynamics of stock price and option price using the one step binomial tree. 2. Draw...
The fixed strike (also known as an average rate) Asian call option with the strike K...
The fixed strike (also known as an average rate) Asian call option with the strike K has the payoff defined as max(A - K, 0), where A is the average observed price of the underlying asset from the time the option is issued up to the time of exercise. Use the 3-step binomial tree to price the fixed strike Asian call option of the American exercise type. Assume that the spot price is $50. The time to maturity T is...
Based on the spot price of $26 and the strike price $28 as well as the...
Based on the spot price of $26 and the strike price $28 as well as the fact that the risk-free interest rate is 6% per annum with continuous compounding, please undertake option valuations and answer related questions according to following instructions: Binomial trees: Additionally, assume that over each of the next two four-month periods, the share price is expected to go up by 11% or down by 10%. Use a two-step binomial tree to calculate the value of an eight-month...
Suppose that a 6-month European call A option on a stock with a strike price of...
Suppose that a 6-month European call A option on a stock with a strike price of $75 costs $5 and is held until maturity, and 6-month European call B option on a stock with a strike price of $80 costs $3 and is held until maturity. The underlying stock price is $73 with a volatility of 15%. Risk-free interest rates (all maturities) are 10% per annum with continuous compounding. Use put-call parity to explain how would you construct a European...
A 3-month American call option on a stock has a strike price of $20. The stock...
A 3-month American call option on a stock has a strike price of $20. The stock price is $20, the risk-free rate is 3% per annum, and the volatility is 25% per annum. A dividend of $1 per share is expected at the end of the second month. Use a three-step binomial tree to calculate the option price.
Consider a European call option on a non-dividend-paying stock where the stock price is $40, the...
Consider a European call option on a non-dividend-paying stock where the stock price is $40, the strike price is $40, the risk-free rate is 4% per annum, the volatility is 30% per annum, and the time to maturity is 6 months. (a) Calculate u, d, and p for a two-step tree. (b) Value the option using a two-step tree. (c) Verify that DerivaGem gives the same answer. (d) Use DerivaGem to value the option with 5, 50, 100, and 500...
Use the following information for questions 18 & 19. Bank of America (BofA) is currently selling...
Use the following information for questions 18 & 19. Bank of America (BofA) is currently selling for $30.20 and the risk-free rate is 2.75% per annum with continuous compounding for all horizons up to 9 months. BofA stock has a volatility of 30%. If you are interested in pricing a 6-month European call option on BofA with a strike of $30 using a 6-step binomial tree what is the risk-neutral probability of the stock going up? (Assume you are using...
There is a six month European call option available on XYZ stock with a strike price...
There is a six month European call option available on XYZ stock with a strike price of $90. Build a two step binomial tree to value this option. The risk free rate is 2% (per period) and the current stock price is $100. The stock can go up by 20% each period or down by 20% each period. Select one: a. $14.53 b. $17.21 c. $18.56 d. $12.79 e. $19.20
Consider a European-style call option on a stock that is currently trading at £100. The strike...
Consider a European-style call option on a stock that is currently trading at £100. The strike price of the call is £90. Assume that, in the next 12 months, the stock price can either go up to £120 or go down to £80. Using risk-neutral valuation, calculate the current value of the option if the risk-free rate is 5 percent per annum. Use discrete compounding. Which of the following is correct? A. £18 B. £18.5 C. £18.75 D. £19
The current price of a non-dividend paying stock is $90. Use a two-step binomial tree to...
The current price of a non-dividend paying stock is $90. Use a two-step binomial tree to value a European call option on the stock with a strike price of $88 that expires in 6 months. Each step is 3 months, the risk free rate is 5% per annum with continuous compounding. What is the option price when u = 1.2 and d = 0.8? Assume that the option is written on 100 shares of stock.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT