Question

# Let S = \$65, r = 3% (continuously compounded), d = 5%, s = 30%, T...

Let S = \$65, r = 3% (continuously compounded), d = 5%, s = 30%, T = 2. In this situation, the appropriate values of u and d are 1.32313 and 0.72615, respectively. Using a 2-step binomial tree, calculate the value of a \$55-strike European call option.

 Answers: a. \$14.416 b. \$14.291 c. \$13.458 d. \$13.868 e. \$14.519

#### Homework Answers

Answer #1

here , S0 = current stock price

Su = stock price after 1 year if stock price increases

Sd = stock price after 1 year if stock price decreases

Suu = stock price after 2 years if stock price increases

Sdd = stock price after 2 years if stock price decreases

Sud = stock price after 2 years if stock price after 1 year increases and in the 2nd year it decreases

fu = value of option after 1 year if stock price increases

fd = value of option after 1 year if stock price decreases

fuu = value of option after 2 years if stock price increases

fdd = value of option after 2 years if stock price decreases in both years

fud = value of option after 2 years if stock price increases after 1st year and decreases after 2nd year

f = value of option today

hence the correct option is c) 13.458

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