Binomial Step 1 of 3 ID: FRM.OP.BOP.01.0020 The diagram below represents the price movement of a certain stock for 9 months. Using the binomial pricing model, calculate the value of a European call option on this stock with a strike price of $32. Assume that the risk free rate is 5% pa continuously compounded, that there are no arbitrage opportunities and that stocks are infinitely divisible. Give your answer in dollars and cents to the nearest cent. Value of the call option = $ Stock price $33 Stock price $30 Stock price - $27 2 of 3 ID: FRM.OP.BOP.02.0010 The current price of a share is $50. In half a year, this share price can either increase to $53 or decrease to $47. You have sold a European call option on this share where you will have to pay $1,000 if the share price increases and nothing if the share price decreases. The risk free rate is 9% per annum compounding continuously. You may assume that there are no arbitrage opportunities and that shares are infinitely divisible. a) Calculate the number of shares (4) that will need to be bought in order to keep the portfolio riskless. Give your answer to 3 decimal places. Number of shares required b) Calculate the present value of this portfolio. Give your answer in dollars and cents to the nearest cent. Present value of the riskless portfolio = $ d) 3 of 3 ID: FRM.OP.BOP.08.0010 The following two-step binomial tree depicts the yearly price path of an underlying share. The length of each time step is one year and the risk free rate is 6% pa continuously compounded. Eastpac Bank has offered to sell two-year European call options on this share at a price of $11.56 with a strike price of $41. To determine whether to purchase these options at that price, you have decided to use the binomial tree to calculate the option value and compare this with the price offered. According to your calculations, the option offered by Eastpac Bank is priced | under the binomial pricing model you have used a) Binomial Share Prices a) $48.00 b) $53.28 c) $42.72 d) $59.14 e) $47.42 f) $38.02