Question

1. Consider a one-step binomial tree on stock with a current price of $100 that can go either up to $115 or down to $85 in 1 year. The stock does not pay dividend and interest rates are zero. Use the tree to compute the value of a 1-year $100-strike European put option on the stock.

2. Suppose you are long 100 contracts on a 1-year 25-put option on AMZN. How much will your option position increase in value if AMZN stock price goes down by $1 (use negative number if value decreases).

3.Consider a one-step binomial tree on stock with a current price of $100 that can go either up to $115 or down to $85 in 1 year. The stock does not pay dividend and interest rates are zero. Compute the payoff of a 1-year $100-strike European put option on the stock if the stock price ends up at the $115 node of the tree in 1 year.

Answer 1

1)

2)

There is a profit of 2500 so the option position will increase by 2500 because if the price falls you will able to sell at a higher price because of the put option.

Calculation - 1 × 25(lot size) × 100 (contract)

2500

3)

Compute the payoff of a 1-year $100-strike European put option on the stock if the stock price ends up at the $115 node of the tree in 1 year

Using excel

=MAX(100-115,0)
=0

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