Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Oxford Handbook Of Entrepreneurial Finance

Authors: Douglas Cumming

1st Edition

0195391241, 978-0195391244

More Books

Students also viewed these Finance questions

Question

Discuss the goals of financial management.

Answered: 1 week ago

Question

Presentations Approaches to Conveying Information

Answered: 1 week ago