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Imagine all investors are risk-neutral, and we have the following trinomial tree: 0 Stock: So= 80 PBoom = 0.2 Stock price after 6 months
 Imagine all investors are risk-neutral, and we have the following trinomial tree: 0 Stock: So= 80 PBoom = 0.2 Stock price after 6 months PNeutral = 0.7 PBust = ? 100 80 72 Using the risk-neutral option valuation approach, calculate the price of a 6-month put option on this stock with a strike price of $85. Note that we are considering three states of the economy after 6 months: Boom, neutral, and bust. The risk-neutral probability of the economy booming after 6 months is 20%, and the risk-neutral probability of the economy staying neutral after 6 months is 70%. Assume that the risk-free rate is 10% per year. Also, assume the stock does not pay a dividend.
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SOLUTION To calculate the price of a 6month put option using the riskneutral option valuation approach we need to calculate the option prices at each ...
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Income Tax Fundamentals 2013
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
31st Edition
1111972516, 978-1285586618, 1285586611, 978-1285613109, 978-1111972516
