Question

(Derivatives & Risk Management - BOPM: Binomial Options Pricing Model)

EVEN PARTIAL ANSWERS APPRECIATED if unable to provide an entire answer

CONSIDER THE FOLLOWING STOCK

A stock is currently priced at $40. (S)

At the end of the month, it will be either $42 (S_u ) or $38 (S_d)

The risk-free rate is 8% (r)

Price of a call option = 1.69 (f)

(i.e. expected value of payoff)

Delta = 0.75 and  = $28.50 in arb model

p = 0.5669 in the risk neutral case.

(probability of UP S.O.N., also shown as PR(increase)

What is the value of a call option with one month to maturity and a strike price of $39?

Use both the:

-arbitrage based pricing model

-the risk neutral pricing model.

...What is the value of the corresponding put if f_{put = $0.43?}

Answer 1