Question
You believe that the covid-19 situation will improve in the coming months and investment activities will increase. Hence you expect the HSI will go up.
You believe that the covid-19 situation will improve in the coming months and investment activities will increase. Hence you expect the HSI will go up.
In order to capture the profit, you decide to invest in the call option of HSI. Here is the information on the (European) call option and the market:
Option: Call
Strike Price: 28000 Time to maturity: 1 Year u (per 6-month): 1.25 d (per 6-month): 0.75
Dividends: 0 Current price of HSI: 28000
Risk-free rate: 4% p.a. (continuously compounded)
(a) Construct a 2-period binomial tree for HSI. (6-month per period.)
(b) What is the premium of the call option today?
(c) Suppose you observed that in the market, there is an interesting call option that offer a very special payoff. When the option is exercised, the payoff is equal to the average price of HSI throughout the life of the option less the strike price (28000). What is the premium of this special call option?
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