Question
A stock's price is $100. Over each of the next two three month periods it is expected to go up by 15% or down by
A stock's price is $100. Over each of the next two three month periods it is expected to go up by 15% or down by 10%. The risk free rate is 4% p.a. The stock pays a dividend of $1 per quarter. Assume the option expires the day before the second period dividend is paid.
a. What should be the current price of a 6-month European style put option with a strike price of $95?
b. What should be the current price of a 6-month American style put option with a strike price of $95?
c. What should be the current price of a 6-month European style call option with a strike price of $95?
d. What should be the current price of a 6-month American style call option with a strike price of $95?
p= (1+.01-.9)/(1.15-.9)=0.44
a. Puu = 0; Pud=0; Pdu=0; Pdd= 14.9
Pu= 0; Pd =8.26; Pe = 4.58.
b. Puu = 0; Pud=0; Pdu=0; Pdd= 14.9
Pu= 0; Pd =8.26; Pa = 4.58. (No early exercise)
c. Cuu= 36.1; Cud = 7.6; Cdu= 7.35; Cdd =0;
Cu = 19.94; Cd =3.2; Ce = 10.46
d. Cuu= 36.1; Cud = 7.6; Cdu= 7.35; Cdd =0;
Cu = 19.94 vs early exercise of 20; Cd =3.2; Ca = 10.49
need help knowing how they got the answers and what each term means. It is to help me study for a test
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