Question
The current price of a non-dividend-paying biotech stock is $140 with a volatility of 25%. The risk-free rate is 4%. For a three-month time step:
The current price of a non-dividend-paying biotech stock is $140 with a volatility of 25%. The risk-free rate is 4%. For a three-month time step: (a) What is the percentage up movement? (b) What is the percentage down movement? (c) What is the probability of an up movement in a risk-neutral world? (d) What is the probability of a down movement in a risk-neutral world? Use a two-step tree to value a six-month European call option and a six-month European put option. In both cases the strike price is $150. (a) = 1.1331. The percentage up movement is 13.31% (b) d = 1/u = 0.8825. The percentage down movement is 11.75% (c) The probability of an up movement is (d) The probability of a down movement is0.4911. show how to do the tree values and show me how to get the numbers
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started