Question
A stock price is currently $40. The risk-free interest rate is 12% per annum with continuous compounding. Annual continuously compounded volatility is 10%. Construct a
A stock price is currently $40. The risk-free interest rate is 12% per annum with
continuous compounding. Annual continuously compounded volatility is 10%.
Construct a binomial tree for two periods and calculate the value of the options by
working back through the binomial tree.
a) What is the value of a 6-month European put option with a strike price of $42?
b) What is the value of a 6-month American put option with a strike price of $42?
c) What is your replicating portfolio today for a 6-month European put and
American Put option with a strike price of $42?
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Fundamentals of Financial Management
Authors: Eugene F. Brigham, Joel F. Houston
13th edition
978-1285027371, 128502737X, 978-1133541141
