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Consider a two-period binomial model in which a stock trades currently at $44. The stock price can go up 6% or down 6% each
Consider a two-period binomial model in which a stock trades currently at $44. The stock price can go up 6% or down 6% each period. The risk free rate is 2% per period. A) Calculate the price of a call option expiring in two periods with an exercise price of $45. B) Calculate the price of a put option expiring in two periods with an exercise price of $45. C) Based on your answer in A), calculate the number of shares of the underlying stock that would be needed at t=0 in the binomial tree to construct a risk-free hedged portfolio which includes 10,000 calls. a) Call Price b) Put Price c) No. of shares at t=0 Consider a two-period binomial model in which a stock trades currently at $44. The stock price can go up 6% or down 6% each period. The risk free rate is 2% per period. A) Calculate the price of a call option expiring in two periods with an exercise price of $45. B) Calculate the price of a put option expiring in two periods with an exercise price of $45. C) Based on your answer in A), calculate the number of shares of the underlying stock that would be needed at t=0 in the binomial tree to construct a risk-free hedged portfolio which includes 10,000 calls. a) Call Price b) Put Price c) No. of shares at t=0 Consider a two-period binomial model in which a stock trades currently at $44. The stock price can go up 6% or down 6% each period. The risk free rate is 2% per period. A) Calculate the price of a call option expiring in two periods with an exercise price of $45. B) Calculate the price of a put option expiring in two periods with an exercise price of $45. C) Based on your answer in A), calculate the number of shares of the underlying stock that would be needed at t=0 in the binomial tree to construct a risk-free hedged portfolio which includes 10,000 calls. a) Call Price b) Put Price c) No. of shares at t=0
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To calculate the prices of the call and put options in this twoperiod binomial model we can use the riskneutral pricing approach Lets break down each ...Get Instant Access to Expert-Tailored Solutions
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