Question

*The following information applies to the next two
questions.*

One-year interest rates are 5%. A stock currently sells for $40 and will either rise to $50 or fall to $35 in six months.

8. Using the binomial option pricing model, determine the fair value of a $45 call.

a. $1.45

b. $1.95

c. $2.75

d. $3.45

9. Using the binomial option pricing model, determine the fair value of a $45 put.

a. $3.89

b. $4.78

c. $5.86

d. $6.54

Answer #1

The one year call option on Caddo Inc. stock has an exercise
price of 45. The current value of Caddo is 46. On the maturity
date, the value of Caddo will be either 51 or 43. The risk free
rate is 5%. Use the binomial option pricing model to find a fair
value for the call option.

The one year call option on Caddo Inc. stock has an exercise
price of 45. The current value of Caddo is 46. On the maturity
date, the value of Caddo will be either 51 or 43. The risk free
rate is 3%. Use the binomial option pricing model to find a fair
value for the call option.

Use the following
information to answer the next two questions.
A stock currently
trades for $110 per share. Call options on the stock are available
with a strike price of $115. The options expire in 20 days. The
annual risk free rate is 4% and the expected standard deviation is
0.40.
Find the value of a
call option using the Black-Scholes option pricing model (Assume
365 days per year)
Use the Black-Scholes
option pricing model to find the value of...

Suppose one-year interest rates are 6%. A stock currently sells
for $100 and at the end of one year will sell for either $110 or
$95. Using binomial pricing, calculate the value of a $105
call.

Answer the following 10 True or False questions by filling in
your answers in the table provided at the end of this section. Each
correct answer will be awarded 2 marks.
A stock is trading at $100. A call option on the stock with
a maturity of three months is trading at $6.60 and has a delta of
0.7. If the stock price increases to 101, the new call price will
be exactly $6.20.
In Black-Scholes option pricing model, the...

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
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using...

1- A one-year European call option on Stanley Industries stock
with a strike price of $55 is currently trading for $75 per share.
The stock pays no dividends. A one-year European put option on the
stock with a strike price of $55 is currently trading for $100. If
the risk-free interest rate is 10 percent per year, then what is
the current price on one share of Stanley stock assuming no
arbitrage?
2- The current price of MB Industries stock...

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