Suppose that a stock currently trades for $100, that the risk-free interest rate is 2% per...
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Suppose that a stock currently trades for $100, that the risk-free interest rate is 2% per annum, and European call options with expiry in 1 year have strike prices of $115 and $130, and currently trade for $2.15 and $0.36, respectively. Use a 1-period binomial tree to estimate the present value of a digital call option (on the same stock with the same expiry) with a strike price of $110. (b) Calculate the drift of the stock in the above model if the probability that the stock price rises is p = 0.80. Suppose that a stock currently trades for $100, that the risk-free interest rate is 2% per annum, and European call options with expiry in 1 year have strike prices of $115 and $130, and currently trade for $2.15 and $0.36, respectively. Use a 1-period binomial tree to estimate the present value of a digital call option (on the same stock with the same expiry) with a strike price of $110. (b) Calculate the drift of the stock in the above model if the probability that the stock price rises is p = 0.80.
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Solution a To estimate the present value of a digital call option with a strike price of 110 using a 1period binomial tree we first need to calculate ... View the full answer
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