- 7 Stock X Has A Current Price Of 60 And Its Annualized Volatility Is 30 Consider A 1 Year European Derivative On Sto 1 (139.04 KiB) Viewed 66 times
7. Stock X has a current price of $60 and its annualized volatility is 30%. Consider a 1-year European derivative on Sto
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7. Stock X has a current price of $60 and its annualized volatility is 30%. Consider a 1-year European derivative on Sto
7. Stock X has a current price of $60 and its annualized volatility is 30%. Consider a 1-year European derivative on Stock X with payoff max (min (Si - 60 - 10,10), 0] - where Sy is the stock price after one year. The risk-free force of interest is 8% per annum. (a) Sketch the payoff function of this derivative as a function of S. [3 marks] (b) Construct this derivative using only call and put options. You can use a combi- nation of options with different strike prices. [3 marks] (c) Using a two-period binomial tree, calculate the current value of this derivative. (5 marks] (d) Suppose Stock X has a beta of 1.3. Using the two-period binomial tree con- structed in part (c), calculate the current beta of the derivative. [5 marks] [Total: 16 marks]
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