Question

Consider the following scenario: The price of a stock currently trading at $80 can go up by 10% or down by 15% per period for two periods. The risk-free rate is 3% p.a. (continuous compounding). A European put option expiring in 2-years has a strike price of $77. (Note: Present all your calculations regarding the values in each node of the binomial tree and round up your answers to 3 decimal digit)

a. Calculate the current value of this European put option.

b. Determine the value of an American version of this put option.

Answer #1

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 $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?

Consider a one-step binomial tree on stock with a current price
of $200 that can go either up to $230 or down to $170 in 2 years.
The stock does not pay dividend. Continuously compounding interest
rate is 5%. Compute the payoff of a 2-year $210-strike European
call option on the stock if the stock price ends up at the $230
node of the tree in 2 years.

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.

Please show work.
Consider a two-period binomial tree with the following
parameters: S = 100, u = 1:20, d = 0:80, and R = 1:10. Suppose also
that a dividend of $5 is expected after one period.
Find the tree of prices of a European Put option with a strike
of 100 expiring in two periods.
Find the tree of prices of an American Put option with a strike
of 100 expiring in two periods.
Is there a difference between...

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...

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.

Consider a one-step binomial tree on stock with a current price
of $200 that can go either up to $230 or down to $170 in 2 years.
The stock does not pay dividend. Continuously compounding interest
rate is 5%. Use the tree to compute the value of a 2-year
$210-strike European call option on the stock.

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.

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.

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 5 minutes ago

asked 25 minutes ago

asked 47 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 3 hours ago

asked 3 hours ago

asked 3 hours ago