Question
1A stock is currently trading at $100. In each one-month period of a binomial tree, the stock will either increase in price by a factor
1A stock is currently trading at $100. In each one-month period of a binomial tree, the stock will either increase in price by a factor of u = 1.05 or fall by a factor of d = 0.90. The risk-free rate per period of the binomial tree is 0.1668%, i.e., an investment of a dollar at the risk-free rate returns $1.001668 after one period. What is the risk-neutral probability of the stock finishing in the money on a 100-strike, two-month call option? (a) 0.46 (b) 0.50 (c) 0.89 (d) 0.90
2A stock is currently trading at $100. In each one-month period of a binomial tree, the stock will either increase in price by a factor of u = 1.05 or fall by a factor of d = 0.90. The risk-free rate per period of the binomial tree is 0.1668%, i.e., an investment of a dollar at the risk-free rate returns $1.001668 after one period. What is the risk-neutral probability of the stock finishing in the money on a 100-strike, two-month call option? (a) 0.46 (b) 0.50 (c) 0.89 (d) 0.90
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