Short answer questions Question 3 (16 marks) Submission instructions Write your answers to question 3 on paper and scan your answers to ONE POF file with multiple pages. Name the PDF file as "Q3_Studenti pdf Use the submission box below to submit the PDF file do not include your answers to other questions in your submission to question 3. Penalty will apply if you fail to follow the instructions 20% You have been tracking the performance of a small tech company, Delta Inc. in 6 months time, the company will announce the result of its current research project, whether it is successful or not. You speculate the share price of the company will increase at that time as you have heard rumours that the research project is going very well To profit from the speculation, you decide to purchase at-the-money 6-month call options on Delta Inc. The current share price is $25. The company is not expected to pay any dividend in the next 6 months. The risk-free rate per 3 months is 1.4% compounded quarterly and is constant in the next 6 months Part 1 (9 marks): Use the risk neutral probability method and answer questions (a) and (b). For this part only, assume that in any 3 months, the share price can either go up by 25% or down by {a) Draw the two-period binomial tree. In the diagram, label the corresponding time period, the share price at each node and the option payoffs in the last period. (b) Calculate the value of the call option at to using the risk-neutral probability method Part 2 (7 marks): (c) Assume the standard deviation of the company's asset is 0.25. Use the Black Scholes Option Pricing Model to price the same call option Click here to download the fumustine Normal Distribution table Instructions to use the table calculate the values as accurately as possible and round the values to 2 decimal points before you use the table Small deviations will not attract a penalty Short answer questions Question 3 (16 marks) Submission instructions Write your answers to question 3 on paper and scan your answers to ONE POF file with multiple pages. Name the PDF file as "Q3_Studenti pdf Use the submission box below to submit the PDF file do not include your answers to other questions in your submission to question 3. Penalty will apply if you fail to follow the instructions 20% You have been tracking the performance of a small tech company, Delta Inc. in 6 months time, the company will announce the result of its current research project, whether it is successful or not. You speculate the share price of the company will increase at that time as you have heard rumours that the research project is going very well To profit from the speculation, you decide to purchase at-the-money 6-month call options on Delta Inc. The current share price is $25. The company is not expected to pay any dividend in the next 6 months. The risk-free rate per 3 months is 1.4% compounded quarterly and is constant in the next 6 months Part 1 (9 marks): Use the risk neutral probability method and answer questions (a) and (b). For this part only, assume that in any 3 months, the share price can either go up by 25% or down by {a) Draw the two-period binomial tree. In the diagram, label the corresponding time period, the share price at each node and the option payoffs in the last period. (b) Calculate the value of the call option at to using the risk-neutral probability method Part 2 (7 marks): (c) Assume the standard deviation of the company's asset is 0.25. Use the Black Scholes Option Pricing Model to price the same call option Click here to download the fumustine Normal Distribution table Instructions to use the table calculate the values as accurately as possible and round the values to 2 decimal points before you use the table Small deviations will not attract a penalty
