Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Alex is looking to price a 6-month European put option with a strike price of $29 on a share in Omni Consumer Products (OCP). The

image text in transcribed

Alex is looking to price a 6-month European put option with a strike price of $29 on a share in Omni Consumer Products (OCP). The current price for an OCP share is $30. Alex has used past data and his own judgement to estimate the volatility of these shares to be 15% per annum. The risk free continuously compounding interest rate is 5% per year.

(a) Construct a 3-step binomial tree showing the possible share prices over the next 6 months. Also, clearly show the corresponding probabilities for an upward and a downward movement in the share price.

As a check, the numbers 26.5419 and 31.8945 should appear in your tree.

(b) using your binomial tree form part (a) and the information given above, calculate the corresponding 3 step tree containing the corresponding option values and clearly state the fair price of the option according to the given information.

image text in transcribed
As a check, the numbers 0.1537 and 0.7820 should appear in your tree. c) Using the binomial tree constructed in part b), estimate the time zero (t = 0) values of delta (4), theta (@), and gamma (I) ONLY. You do NOT need to calculate nu (v) and rho (p)

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

Foundations Of Finance

Authors: Arthur J. Keown, John H. Martin, J. William Petty

10th Edition

0135160618, 978-0135160619

More Books

Students also viewed these Finance questions

Question

What are the legal ConSeQuenCeS of a data BreaCh? Appendix

Answered: 1 week ago