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Question 1 . Answer the following from the paper Real Options in Finance . a . What are the strengths of real option valuation according
Question Answer the following from the paper Real Options in Finance a What are the strengths of real option valuation according to the paper? Describe each. b What are the weaknesses and challenges of real option valuation according to the paper? Describe each. Question The price of a stock is currently $ and the historic annualized volatility of that stock is Assume riskfree interest rate with continuous compounding to be per year. The value of a month European call option with a strike price at $ is to be found using a twostep binomial option pricing model. Answer the following to help find the value of the option. a What are the values of u d and qTo find the value of use the Excel function exp with values of and b Draw stock tree using the information provided. Indicate expected values of stock at expiration as well as at intermediate nodes. c What are the values of payoffs at expiration at months for the option? d What are the values at the intermediate nodes at month for the option? e What is the value of the option at present? f Draw a treediagram for the option. Indicate the value of the option at each node. Question Answer questions c to f as above for a month European put option using a twostep binomial model with strike price at $ The values of u d and q will be same as in part a above. The stock tree will also be the same for this as part b above. Question The price of a stock is currently $ and the historic annualized volatility of that stock is per year. The riskfree interest rate with continuous compounding is per year. Suppose you are planning to value a month European put option using a fourstep binomial option pricing model. Strike price for the option is $ a What are the values of u d and q b Draw stock tree using the information provided. Indicate value of stock at expiration as well as at the intermediate nodes. There should be values as shown in the following. c What are the values of payoff for the option at expiration? d What are the values of the option at each of the nine intermediate nodes? e What is the current price of the option?
Question Answer the following from the paper Real Options in Finance
a What are the strengths of real option valuation according to the paper? Describe each.
b What are the weaknesses and challenges of real option valuation according to the paper? Describe
each.
Question The price of a stock is currently $ and the historic annualized volatility of that stock is
Assume riskfree interest rate with continuous compounding to be per year. The value of a
month European call option with a strike price at $ is to be found using a twostep binomial option
pricing model. Answer the following to help find the value of the option.
a What are the values of u d and qTo find the value of use the Excel function exp with values
of and
b Draw stock tree using the information provided. Indicate expected values of stock at expiration as well
as at intermediate nodes.
c What are the values of payoffs at expiration at months for the option?
d What are the values at the intermediate nodes at month for the option?
e What is the value of the option at present?
f Draw a treediagram for the option. Indicate the value of the option at each node.
Question Answer questions c to f as above for a month European put option using a twostep binomial
model with strike price at $ The values of u d and q will be same as in part a above. The stock tree will
also be the same for this as part b above.
Question The price of a stock is currently $ and the historic annualized volatility of that stock is
per year. The riskfree interest rate with continuous compounding is per year. Suppose you
are planning to value a month European put option using a fourstep binomial option pricing model. Strike
price for the option is $
a What are the values of u d and q
b Draw stock tree using the information provided. Indicate value of stock at expiration as well as at the
intermediate nodes. There should be values as shown in the following.
c What are the values of payoff for the option at expiration?
d What are the values of the option at each of the nine intermediate nodes?
e What is the current price of the option?
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