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Problem 1 Here, work through the steps to value a call with a one-period binomial model S $125 K $125 T = 1 year 1
| Problem 1 | ||||
| Here, work through the steps to value a call with a one-period binomial model | ||||
| S | $125 | |||
| K | $125 | |||
| T = 1 year | 1 | |||
| u | 1.25 | |||
| d | 0.80 | |||
| Su | $156 | |||
| Sd | $100 | |||
| r (annual) | 5.650% | |||
| a) | What are Cu and Cd | |||
| b) | What is the hedge ratio? | |||
| c) | What does the hedge ratio mean in terms of number of shares and calls? | |||
| d) | What is the value of p (the risk neutral probability of the stock price increasing)? | |||
| e) | What is the value of 1-p (the risk-neutral probability of the stock price decreasing)? | |||
| f) | What is the value of the call? | |||
| g) | What would "u" be for the single 1 year period if the standard deviation of the stock were 25% per year (T=1) |
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Managerial Accounting
Authors: Jennifer Cainas, Celina J. Jozsi, Kelly Richmond Pope
1st Edition
0137689454, 9780137689453
