Question
1. Suppose a nondividend paying stock is priced today at ________ (you pick a price between 30.00 and 50.00 like $32.47) and its standard deviation
1. Suppose a nondividend paying stock is priced today at ________ (you pick a price between 30.00 and 50.00 like $32.47) and its standard deviation of returns is 20%. A call option on the stock trades on the CBOE with a X=38 and one year maturity. Assume r=3%. Use a one-step binomial to compute the value of the call as of today. Compute u, d, h, and the probability of the stock going up as done in the video to chapter 4. Compute the payoffs at maturity. Show all work for credit. In particular, make sure I can follow whether the payoffs etc. you are showing me are up or down payoffs. Do not use option pricing software and it won't help you with the details of the intermediate steps the question is looking for.
2. Now use the same stock and stock price from the question above. A put option on the stock trades on the CBOE with a X=38 and one year maturity. Assume r=3%. Use a one-step binomial to compute the value of the put as of today. Show all work for credit. Show u, u, h, and the probability of an up move by the stock. In particular, make sure I can follow whether the payoffs etc. you are showing me are up or down payoffs.
Do not use option pricing software and it won't help you with the details of the intermediate steps the question is looking for.
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