Answered step by step
Verified Expert Solution
Question
1 Approved Answer
1. The following Binomial Tree of a period was used to model the price of the ABC share to calculate the price of a Call
1. The following Binomial Tree of a period was used to model the price of the ABC share to calculate the price of a Call option on the ABC share with a maturity of one year and a strike price of $ 10: Sy = $12 So = $10. Sa = $8 i) The real probability of a rise in the price of the ABC share is 0.75. ii) The ABC share does not pay dividends. iii) The Call option on the ABC share with a maturity of one year and the exercise price of $ 10 has a price of $ 1.13. iv) Consider the risk-free rate r compounded continuously. After reviewing, it is observed that there was an error in the construction of the model and that Sa, the fall in the price of the ABC stock within a year should be $6 instead of $8. The actual probability of an increase in the price of the ABC share remains unchanged in the new model and the other assumptions remain unchanged. Recalculate the new price of the Call option
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started