Question
Company Monashs share price is currently traded at $100. Over each of the next two 6-month periods, it is expected to go up by 10%
Company Monashs share price is currently traded at $100. Over each of the next two 6-month periods, it is expected to go up by 10% or down by 10%. The risk-free interest rate is 10% per annum with continuous compounding. (Required: Show your work step by step)
(a) Consider a 12-month European put option with a strike price of $102, calculate the option values at nodes A to F in the following binomial tree. Use the risk-neutral valuation approach of the binomial tree model. Show your calculation and explain.
|
| Node D |
Suu = 121 | ||
fuu = | ||
| Node B |
|
Su = 110 | ||
fu = | ||
Node A |
| Node E |
S = 100 | Sud = 99 | |
f = | fud = | |
| Node C |
|
Sd = 90 | ||
fd = | ||
|
| Node F |
Sdd = 81 | ||
fdd = |
(b) If the value of a 12-month European call option with a strike price of $102 is $6.2, check whether the put-call parity hold.
(c) If the put option is American, would it be optimal to exercise it early at nodes A, B, and C? Show your calculation and explain.
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