Question

The stock price is currently $30. Each month for the next two months it is expected...

The stock price is currently $30. Each month for the next two months it is expected to increase by 8% or reduce by 10%. The risk-free interest rate is 5%. Use a two-step tree to calculate the value of a derivative that pays off [max(30 — St； 0)]2, where St is the stock price in two months?

If the derivative is American-style, should it be exercised early?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A stock price is currently $36. During each three-month period for the next six months it...
A stock price is currently $36. During each three-month period for the next six months it is expected to increase by 9% or decrease by 8%. The risk-free interest rate is 5%. Use a two-step tree to calculate the value of a derivative that pays off (max[(40-ST),0])2 where ST is the stock price in six months. What are the payoffs at the final nodes of the tree? [1 mark] Use no-arbitrage arguments (you need to show how to set up...
The volatility of a non-dividend-paying stock whose price is $50, is 30%. The risk-free rate is...
The volatility of a non-dividend-paying stock whose price is $50, is 30%. The risk-free rate is 5% per annum (continuously compounded) for all maturities. Use a two-step tree to calculate the value of a derivative that pays off [max(?! − 63, 0)]" where ST is the stock price in six months?
The volatility of a non-dividend-paying stock whose price is $50, is 30%. The risk-free rate is...
The volatility of a non-dividend-paying stock whose price is $50, is 30%. The risk-free rate is 5% per annum (continuously compounded) for all maturities. Use a two-step tree to calculate the value of a derivative that pays off [max (St − 63, 0)]" where is the stock price in six months?
A stock price is currently $25. It is known that at the end of two months...
A stock price is currently $25. It is known that at the end of two months it will be either $23 or $27. The risk-free interest rate is 10% per annum with continuous compounding. Suppose ST is the stock price at the end of two months. The derivative pays off ST*(ST-S0) at T. Consider a portfolio consisting of long delta shares of stock and short 1 unit of derivative. What delta makes the portfolio risk-free? A. 100 B. 25 C....
A stock price is currently $40. Over each of the next two three-month periods it is...
A stock price is currently $40. Over each of the next two three-month periods it is expected to go up by 10% or down by 10%. The risk-free interest rate is 12% per annum with continuous compounding. What is the value of a six-month European put option with a strike price of $42? What is the value of a six-month American put option with a strike price of $42? What is the value of a six-month American put option with...
A stock price is currently $100. Over each of the next two six-month periods, it is...
A stock price is currently $100. Over each of the next two six-month periods, it is expected to go up by 10% or down by 10%. The risk-free interest rate is 10% per year with semi-annual compounding. Part I. Use the two-steps binomial tree model to calculate the value of a one-year American put option with an exercise price of $101. Part II. Is there any early exercise premium contained in price of the above American put option? If there...
The volatility of a non-dividend-paying stock whose price is $40, is 35%. The risk-free rate is...
The volatility of a non-dividend-paying stock whose price is $40, is 35%. The risk-free rate is 6% per annum (continuously compounded) for all maturities. Use a two-step tree to calculate the value of a derivative that pays off [max(?!−52,0)]" where is the stock price in six months?
A stock price is currently $100. Over each of the next two 3-month periods it is...
A stock price is currently $100. Over each of the next two 3-month periods it is expected to go up or go down with up-factor u and down-factor d. The risk-free interest rate is 6% per annum with continuously compounding. Consider a 6-month American put option with a strike price of K. Find the price of this American put option. Motivate your solutions, discuss early exercising decisions at each nodes prior to the maturity. K = 100, u = 1.3,...
A stock price is currently $40. Over each of the next two three-month periods it is...
A stock price is currently $40. Over each of the next two three-month periods it is expected to go up by10%. The risk-free interest rate is 12% per annum with continuous compounding. (a) What is the value of a six-month European put option with a strike price of $42? (b) What is the value of a six-month American put option with strike price of $42?
A stock price is currently $50. Over each of the next two three-month periods it is...
A stock price is currently $50. Over each of the next two three-month periods it is expected to go up by 8% with a probability of 50% or down by 4% with a probability of 50%. The risk-free interest rate is 4% per annum with continuous compounding. What is the value of a six-month European call option with a strike price of $50? Use binomial tree method to solve this problem.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT