Question

Problem: For a two-period binomial model, you are given: (i) Each period is one year. h=1...

Problem: For a two-period binomial model, you are given: (i) Each period is one year. h=1 (ii) The current price for a non-dividend-paying stock is 100. S(0)=100 (iii) when stock price goes up u=1.25, (iv) when stock price down d=0.80, (v) The continuously compounded risk-free interest rate is 7%. r=0.07 Calculate the price of an American call option on the stock with strike price of 100. K=100, was there early exercise?

Homework Answers

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
Similar Questions
Consider a two-period binomial model, where each period is 6 months. Assume the stock price is...
Consider a two-period binomial model, where each period is 6 months. Assume the stock price is $46.00, σ = 0.28, r = 0.06 and the dividend yield is 2.0%. What is the maximum approximate strike price where early exercise would occur with an American call option?
Consider the following data for a two-period binomial model. The stock’s price S is $100. After...
Consider the following data for a two-period binomial model. The stock’s price S is $100. After three months, it either goes up and gets multiplied by the factor U = 1.138473, or it goes down and gets multiplied by the factor D = 0.886643. Options mature after T = 0.5 year and have a strike price of K = $110. The continuously compounded risk-free interest rate r is 5 percent per year. Today’s European call price is c and the...
The value of a call option on a non-dividend paying stock is lower when _______________. I....
The value of a call option on a non-dividend paying stock is lower when _______________. I. the exercise price is higher II. the contract approaches maturity III. the stock decreases in value IV. a stock split occurs
For A 6-month European call option on a stock, you are given: (1) The stock price...
For A 6-month European call option on a stock, you are given: (1) The stock price is 150. (2) The strike price is 130. (3) u=1.3u=1.3 and d=0.7d=0.7. (4) The continuously compounded risk-free rate is 6%. (5) There are no dividends. The option is modeled with a 2-period binomial tree. Determine the option premium.
The current price of a non-dividend paying stock is $90. Use a two-step binomial tree to...
The current price of a non-dividend paying stock is $90. Use a two-step binomial tree to value a European call option on the stock with a strike price of $88 that expires in 6 months. Each step is 3 months, the risk free rate is 5% per annum with continuous compounding. What is the option price when u = 1.2 and d = 0.8? Assume that the option is written on 100 shares of stock.
Price a European call option on non-dividend paying stock by using a binomial tree. Stock price...
Price a European call option on non-dividend paying stock by using a binomial tree. Stock price is €50, volatility is 26% (p.a.), the risk-free interest rate is 5% (p.a. continuously compounded), strike is € 55, and time to expiry is 6 months. How large is the difference between the Black-Scholes price and the price given by the binomial tree?
Price a European call option on non-dividend paying stock by using a binomial tree. Stock price...
Price a European call option on non-dividend paying stock by using a binomial tree. Stock price is €50, volatility is 26% (p.a.), the risk-free interest rate is 5% (p.a. continuously compounded), strike is € 55, and time to expiry is 6 months. How large is the difference between the Black-Scholes price and the price given by the binomial tree?
Consider a non-dividend paying stock currently priced at $100 per share. Over any given 6- month...
Consider a non-dividend paying stock currently priced at $100 per share. Over any given 6- month period, the stock price is expected to go up or down by 10%. The continuously compounded risk-free rate is 8% per annum. The stock’s real-world continuously compounded expected return is 16% per annum. a) (5%) Calculate the current price of a 1-year strike-100 European call option on the stock. b) (5%) Calculate the real-world continuously compounded expected return on the call
i. What is the difference between an American option and a European option? ii.  Does the holder...
i. What is the difference between an American option and a European option? ii.  Does the holder of an option have to exercise it? iii.  Explain why the following statement is true or false. “A call seller is obliged to buy the underlying share at the exercise price.” iv.  Explain how an increase in the strike price affect the value of put and call written on the stock.
Suppose that, in each period of a two-period stock price model, the cost of a security...
Suppose that, in each period of a two-period stock price model, the cost of a security either goes up by a factor of u = 2 or down by a factor d = 1/2. Assume the initial price of the security is $80 and that the interest rate r is 0. a). Compute the risk neutral probabilities p (price moves up) and q = 1−p (price moves down) for this model. b). Sketch a diagram of this two period stock...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT