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The price on a stock is currently set at 13. The risk free interest rate is 4.9% p.a. After three periods, the price has moved

The price on a stock is currently set at 13. The risk free interest rate is 4.9% p.a. After three periods,

the price has moved to 17.78 in the best case (three upward movements) and it holds that =

1/.The maturity of some options is 9 months.

a) What is u and what is d?

b) What is the risk-free interest rate per period?

c) Calculate the risk neutral probability of an upward movement in this BT3.

d) Calculate the payoff profile of a European Call option with exercise price = 14.

Answer

e) Price this call option. r

f) Calculate the payoff profile of a Put option with exercise price = 14.

g) Calculate the value of an American Put option with exercise price = 14.

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