Question
Consider 9-month European-style options written on XYZ stock. Its current stock price is $ 80, its income rate is 2%, and the stock volatility rate
Consider 9-month European-style options written on XYZ stock. Its current stock price is $ 80, its income rate is 2%, and the stock volatility rate is 25%. Assume the risk-free rate is 5%. (a) (5 points) Compute the value of a 9-month call with exercise $80. Use the binomial method with three time steps for the option's life in your computations. Use the CRR coecient. (b) (10 points) Repeat the binomial method with four time steps for the option's life in your computations. (c) (10 points) Compute the BSM value of a 9-month call with exercise $80. Com- pare the BSM value with values in part (a) and (b). Are they same? Why or Why not?
1. (25 points) Consider 9-month European-style options written on XYZ stock. Its current stock price is $ 80, its income rate is 2%, and the stock volatility rate is 25%. Assume the risk-free rate is 5%. (a) (o points) Compute the value of a 9-month call with exercise $80. Use the binomial method with three time steps for the option's life in your computations. b) (10 points) Repeat the binomial method with four time steps for the option's (c) (10 points) Compute the BSM value of a 9-month call with exercise $80. Com- Use the CRR coefficient. life in youoatis. pare the BSM value with values in part (a) and (b). Are they same? Why or Why notStep by Step Solution
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