Question
A non-dividend stock with a price of $88 has a volatility of 30%. The continuous compounding risk-free rate is 12% per annum for all maturities.
A non-dividend stock with a price of $88 has a volatility of 30%. The continuous compounding risk-free rate is 12% per annum for all maturities.
a) What are the u, d and p values in the two-digit binomial tree (each digit is 6 months old)?
b) What is the value of a 1-year European call option with a strike price of $100 given by a two-digit binomial tree?
c) Suppose a trader sells 20 call option contracts (2,000 call options). What position in the stock is necessary to maintain the trader's position during trading? (Hint: Find the delta for the first node and answer the question!
Step by Step Solution
3.35 Rating (155 Votes )
There are 3 Steps involved in it
Step: 1
ANSWER A The following formula are used to price options in the binomial model u size of the up move factoret ...
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
Fundamentals of Futures and Options Markets
Authors: John C. Hull
8th edition
978-1292155036, 1292155035, 132993341, 978-0132993340
