Question
This is a problem that has THREE questions. Therefore, please choose THREE answers (one choice for each question) to get full credit for this questions.
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This is a problem that has THREE questions. Therefore, please choose THREE answers (one choice for each question) to get full credit for this questions.
The current price of a non-dividend-paying stock is $50 and the volatility of a non-dividend paying stock is 20% per annum.
Use a two-step tree to value an American put option on the stock with a strike price of 52 that expires in 1 year. Each step is 6 months, the risk-free rate is 7% per annum with continuous compounding.
1. Which of the following is closest to the Cox, Ross, Rubinstein parameter u for a tree with a 6-month time step?
2. What is the risk-neutral probability?
3. What is the value of the American put option?
#1. u= 1.5692
#1. u= 1.1519
#1. u= 1.2575
#2. p= 0.8525
#2. p=0.6214
#2. p=0.5902
#3. American put value = $3.85
#3. American put value = $3.19
#3. American put value = $3.55
This is a problem that has THREE questions. Therefore, please choose THREE answers (one choice for each question) to get full credit for this questions.
The current price of a non-dividend-paying stock is $50 and the volatility of a non-dividend paying stock is 20% per annum.
Use a two-step tree to value an American put option on the stock with a strike price of 52 that expires in 1 year. Each step is 6 months, the risk-free rate is 7% per annum with continuous compounding.
1. Which of the following is closest to the Cox, Ross, Rubinstein parameter u for a tree with a 6-month time step?
2. What is the risk-neutral probability?
3. What is the value of the American put option?
| #1. u= 1.5692 | ||
| #1. u= 1.1519 | ||
| #1. u= 1.2575 | ||
| #2. p= 0.8525 | ||
| #2. p=0.6214 | ||
| #2. p=0.5902 | ||
| #3. American put value = $3.85 | ||
| #3. American put value = $3.19 | ||
| #3. American put value = $3.55 |
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Investments
Authors: Zvi Bodie, Alex Kane, Alan J. Marcus
8th Edition
0077261453, 978-0077261450
