REQUIRED One share of zero dividend yield stock A is worth 30 now. The continuously compounded riskless interest rate, at which investors can borrow and lend, is 8% per year. a) Using a two-step tree with u=1.1, d=0.9 and 3 month steps, calculate the price of a European (8 marks) b) Assume that stock A price is distributed log-normally such that you can use the Black-Scholes put option with a strike price of 32 that expires in 6 months formula to price options on it. Under the assumptions of question (a) calculate the value of a (7 marks) c) Following the results on question (b), what is the price of a 3-month European call option on (6 marks) d) Calculate how many 3-month put options with a strike price of 33 you need to buy or sell in (6 marks) e) If the spot price of a share of stock B is 28. Devise a synthetic investment strategy that has (7 marks) f List the factors that affect stock option prices. Explain how will the prices of calls and puts European put option with a strike price of of 33 that matures in 3 months? stock A with a strike price of 33 order to hedge a long position of 4500 shares of stock A. the payoff of a 3-month call option with a strike price of 30 options change when interest rates increase and all else remain the same. Would your wer change if the interest rates increase and the price An investment company in UK plans to sell its position in US stocks in three months REQUIRED Describe the way or ways that the UK company can eliminate the sensitivity of its position to ans of the stock decreases? (10 marks) g) the exchange rate changes in three months time (6 marks) REQUIRED One share of zero dividend yield stock A is worth 30 now. The continuously compounded riskless interest rate, at which investors can borrow and lend, is 8% per year. a) Using a two-step tree with u=1.1, d=0.9 and 3 month steps, calculate the price of a European (8 marks) b) Assume that stock A price is distributed log-normally such that you can use the Black-Scholes put option with a strike price of 32 that expires in 6 months formula to price options on it. Under the assumptions of question (a) calculate the value of a (7 marks) c) Following the results on question (b), what is the price of a 3-month European call option on (6 marks) d) Calculate how many 3-month put options with a strike price of 33 you need to buy or sell in (6 marks) e) If the spot price of a share of stock B is 28. Devise a synthetic investment strategy that has (7 marks) f List the factors that affect stock option prices. Explain how will the prices of calls and puts European put option with a strike price of of 33 that matures in 3 months? stock A with a strike price of 33 order to hedge a long position of 4500 shares of stock A. the payoff of a 3-month call option with a strike price of 30 options change when interest rates increase and all else remain the same. Would your wer change if the interest rates increase and the price An investment company in UK plans to sell its position in US stocks in three months REQUIRED Describe the way or ways that the UK company can eliminate the sensitivity of its position to ans of the stock decreases? (10 marks) g) the exchange rate changes in three months time (6 marks)
