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For the whole assignment you can assume the following market data: US risk-free rate: RUS) = 2.4% p.a. Canadian risk-free rate: RCA) = 2.2% p.a.
For the whole assignment you can assume the following market data: US risk-free rate: RUS) = 2.4% p.a. Canadian risk-free rate: RCA) = 2.2% p.a. All interest rates are given with continuous compounding. Consider a 1-year European and a 1-year American put option traded at the CBOE both with exercise price of 74 on an underlying stock with price 72 and stock price volatility of 20%. For this question you may round intermediate values to 2 decimal points. (a) (8 points) Determine the value of the European put option using a two step binomial tree. (b) (3 points) What are the hedge ratios for the European put at nodes u and d? (c) (3 points) Determine the value of American put option using a two step binomial tree. (d) (3 points) Now suppose that just after you bought one American option contract (at time 0) the stock splits 2-for-1. Does the value of your position change? (e) (3 points) What is the value of a European-style option with payoff function: Is K2 For the whole assignment you can assume the following market data: US risk-free rate: RUS) = 2.4% p.a. Canadian risk-free rate: RCA) = 2.2% p.a. All interest rates are given with continuous compounding. Consider a 1-year European and a 1-year American put option traded at the CBOE both with exercise price of 74 on an underlying stock with price 72 and stock price volatility of 20%. For this question you may round intermediate values to 2 decimal points. (a) (8 points) Determine the value of the European put option using a two step binomial tree. (b) (3 points) What are the hedge ratios for the European put at nodes u and d? (c) (3 points) Determine the value of American put option using a two step binomial tree. (d) (3 points) Now suppose that just after you bought one American option contract (at time 0) the stock splits 2-for-1. Does the value of your position change? (e) (3 points) What is the value of a European-style option with payoff function: Is K2
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