Question
The return on Rocky Raccoon Industries stock is binomially distributed, being either up 25%, or down 15%, each period. Assume there are no dividends. The
The return on Rocky Raccoon Industries stock is binomially distributed, being either up 25%, or down 15%, each period. Assume there are no dividends. The current stock price is $100/shr, and the risk-free rate is 5% per period.
a) Show the implied 2 period pattern (t0,t1,t2) of future stock prices,
b) and find the risk neutral probability of an up move.
c) determine the present value of a two period Rocky Raccoon Industries stock EUROPEAN CALL that expires in period 2 and whose strike price is $95/share.
d) determine the present value of a two period Rocky Raccoon Industries stock AMERICAN CALL that expires in period 2 and whose strike price is $95/share.
e) determine the present value of a two period Rocky Raccoon Industries stock EUROPEAN LOOKBACK CALL that expires in period 2 and whose strike price is $95/share.
f) determine the present value of a two period Rocky Raccoon Industries stock EUROPEAN PUT that expires in period 2 and whose strike price is $95/share.
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