Problem #1: Consider a European call option on a stock, with a $30 strike and 1-year to expiration. The stock has a continuous [5 marks] dividend yield of 0%, and its current price is $62. Suppose the volatility of the stock is 11%. The continuously compounded risk-free interest rate is 10%. Use a one-period binomial tree to calculate the following: (a) The payoff for up movement. (b) The payoff for down movement. (c) The corresponding replicating portfolio: The number of shares (d) The corresponding replicating portfolio: The lent/borrowed amount. (e) The option premium. (A) 46.49 (B) 42.49 (C) 43.49 (D) 45.49 (E) 44.49 Problem #1(a): Select Part (a) choices. (A) 30.38 (B) 31.38 (C) 34.38 (D) 32.38 (E) 33.38 Problem #1(b): Select Part (b) choices. (A) -3.00 (B) -2.00 (C) -0.00 (D) 1.00 (E)-1.00 Problem #1(c): Select 1 Part (c) choices. (A) -29.15 (B) -26.15 (C) -30.15 (D) -27.15 (E) -28.15 Problem #1(d): Select Part (d) choices. (A) 31.85 (B) 33.85 (C) 35.85 (D) 34.85 (E) 32.85 Problem #1(e): Select Part (e) choices. Save Problem #2: (Problem #1 Continued) [5 marks] Now, suppose that the continuously compounded return is a = 18%. Find the following: (a) The true probability of the stock going up. (b) The actual expected payoff of the option. (c) The appropriate per-period discount rate y. (A) 0.83 (B) 0.85 (C) 0.91 (D) 0.87 (E) 0.89 Problem #2(a): Select Part (a) choices. (A) 45.23 (B) 46.23 (C) 43.23 (D) 44.23 (E) 42.23 Problem #2(b): Select Part (b) choices. (A) 0.30 (B) 0.26 (C) 0.28 (D) 0.24 (E) 0.22 Problem #2(c): Select 1 Part (c) choices. Save Problem #1: Consider a European call option on a stock, with a $30 strike and 1-year to expiration. The stock has a continuous [5 marks] dividend yield of 0%, and its current price is $62. Suppose the volatility of the stock is 11%. The continuously compounded risk-free interest rate is 10%. Use a one-period binomial tree to calculate the following: (a) The payoff for up movement. (b) The payoff for down movement. (c) The corresponding replicating portfolio: The number of shares (d) The corresponding replicating portfolio: The lent/borrowed amount. (e) The option premium. (A) 46.49 (B) 42.49 (C) 43.49 (D) 45.49 (E) 44.49 Problem #1(a): Select Part (a) choices. (A) 30.38 (B) 31.38 (C) 34.38 (D) 32.38 (E) 33.38 Problem #1(b): Select Part (b) choices. (A) -3.00 (B) -2.00 (C) -0.00 (D) 1.00 (E)-1.00 Problem #1(c): Select 1 Part (c) choices. (A) -29.15 (B) -26.15 (C) -30.15 (D) -27.15 (E) -28.15 Problem #1(d): Select Part (d) choices. (A) 31.85 (B) 33.85 (C) 35.85 (D) 34.85 (E) 32.85 Problem #1(e): Select Part (e) choices. Save Problem #2: (Problem #1 Continued) [5 marks] Now, suppose that the continuously compounded return is a = 18%. Find the following: (a) The true probability of the stock going up. (b) The actual expected payoff of the option. (c) The appropriate per-period discount rate y. (A) 0.83 (B) 0.85 (C) 0.91 (D) 0.87 (E) 0.89 Problem #2(a): Select Part (a) choices. (A) 45.23 (B) 46.23 (C) 43.23 (D) 44.23 (E) 42.23 Problem #2(b): Select Part (b) choices. (A) 0.30 (B) 0.26 (C) 0.28 (D) 0.24 (E) 0.22 Problem #2(c): Select 1 Part (c) choices. Save