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Determine the price of the call option using the no-arbitrage pricing method. Assume that the bond is callable in six month with a put price
Determine the price of the call option using the no-arbitrage pricing method.
Assume that the bond is callable in six month with a put price of $784, what is the price of the put option at ?0?
Step 1: Binomial tree for the call option
Step 2: The price of the put option
Period Years Annualized Spot Rate 1 0.5 4% 2 1.0 4.15% 3 1.5 4.25% to t1 t2 5% 50% 50% 4.5% 50% 4% 4% 50% 50% 3.5% 50% 3%
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