The value of an option can be calculated by using a step-by-step approach in the case of single periods or by using sophisticated formulas that can be easily created through a spreadsheet. In the real world, two possible outcomes for a stock price in six months is an assumption. The stock markets are volatile, and stocks move up and down based on market- and firm-specific factors. Use the following formula to calculate the value of any call option within the same time period. To use the formula for different call options, you can solve this formula with algebra or program it into a spreadsheet. + enlt) dl. Cu - einelt) u-d u-d et) Based on your understanding of the binomial option pricing model, is the following statement true or false? Ny is the price of an option that will return $1 if the price of the underlying stock goes up and $0 if the price of underlying stock goes down. False True You have the following information about Learn More Inc.'s stock and a two-month call option with a strike price of $115.20. Learn More Inc.'s current stock price is $96.00. You are using the multiperiod binomial option pricing model to find the value of the two-month option with two periods. Tu and To values given here apply to any period. Data Collected for Learn More Inc. 1.5032 0.6833 0.2216 0.3857 You work with a junior analyst to calculate the value of the option, and she submits her inferences to you. Which of the following points are true in the case of Learn More Inc.'s stock options? Check all that apply. O The option payoff if the stock goes up in two months will be $29.11. The value of the two-month call option with a strike price of $115.20 at the end of two months will be $6.45. The value of the call option will always remain $6.45, irrespective of the time until expiration. Learn More Inc.'s stock price after two months likely will be $144.31 if the stock goes up by a factor of 1.5032. 9. Put-call parity and the value of a put option Aa Aa 3 Consider two portfolios A and B. At the expiration date, t, both portfolios have identical payoffs. Portfolio A consists of a put option and one share of stock. Portfolio B has a call option (with the same strike price and expiration date as the put option) and cash in the amount equal to the present value (PV) of the strike price discounted at the continuously compounded risk-free rate, which is Xe rRFt. At expiration, the stock price is Pt, and the value of this cash will equal the strike price, X. Let V stand for the value of the call option as defined in the Black-Scholes model. Complete the equation for the value of a put option: Put Option = 1 Xe-rRFt XrRrt Now consider the stock of PietreDure Enterprise at the price P = $20 per share. A put option written on PDE's stock has an exercise price of X = $25 and 18 months rer piration. The risk-free rate is PRF = 8%. A call option written on PDE has the same exercise price and expiration date as the put option. If the call option has a price of Vc = $6.50, then the price of the put option is $8.67 (Note: Use 2.7183 as the approximate value of e.) The value of an option can be calculated by using a step-by-step approach in the case of single periods or by using sophisticated formulas that can be easily created through a spreadsheet. In the real world, two possible outcomes for a stock price in six months is an assumption. The stock markets are volatile, and stocks move up and down based on market- and firm-specific factors. Use the following formula to calculate the value of any call option within the same time period. To use the formula for different call options, you can solve this formula with algebra or program it into a spreadsheet. + enlt) dl. Cu - einelt) u-d u-d et) Based on your understanding of the binomial option pricing model, is the following statement true or false? Ny is the price of an option that will return $1 if the price of the underlying stock goes up and $0 if the price of underlying stock goes down. False True You have the following information about Learn More Inc.'s stock and a two-month call option with a strike price of $115.20. Learn More Inc.'s current stock price is $96.00. You are using the multiperiod binomial option pricing model to find the value of the two-month option with two periods. Tu and To values given here apply to any period. Data Collected for Learn More Inc. 1.5032 0.6833 0.2216 0.3857 You work with a junior analyst to calculate the value of the option, and she submits her inferences to you. Which of the following points are true in the case of Learn More Inc.'s stock options? Check all that apply. O The option payoff if the stock goes up in two months will be $29.11. The value of the two-month call option with a strike price of $115.20 at the end of two months will be $6.45. The value of the call option will always remain $6.45, irrespective of the time until expiration. Learn More Inc.'s stock price after two months likely will be $144.31 if the stock goes up by a factor of 1.5032. 9. Put-call parity and the value of a put option Aa Aa 3 Consider two portfolios A and B. At the expiration date, t, both portfolios have identical payoffs. Portfolio A consists of a put option and one share of stock. Portfolio B has a call option (with the same strike price and expiration date as the put option) and cash in the amount equal to the present value (PV) of the strike price discounted at the continuously compounded risk-free rate, which is Xe rRFt. At expiration, the stock price is Pt, and the value of this cash will equal the strike price, X. Let V stand for the value of the call option as defined in the Black-Scholes model. Complete the equation for the value of a put option: Put Option = 1 Xe-rRFt XrRrt Now consider the stock of PietreDure Enterprise at the price P = $20 per share. A put option written on PDE's stock has an exercise price of X = $25 and 18 months rer piration. The risk-free rate is PRF = 8%. A call option written on PDE has the same exercise price and expiration date as the put option. If the call option has a price of Vc = $6.50, then the price of the put option is $8.67 (Note: Use 2.7183 as the approximate value of e.)
