5.- Current Stock price S¢0) is $30; risk-free rate is 5%. There are two possible outcome in one year, stock price might

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5 Current Stock Price S 0 Is 30 Risk Free Rate Is 5 There Are Two Possible Outcome In One Year Stock Price Might 1 (232.66 KiB) Viewed 26 times

5.- Current Stock price S¢0) is $30; risk-free rate is 5%. There are two possible outcome in one year, stock price might go up 30% (to $39) or go down 30% (to $21). Consider both a call and a put with the same strike price of $30 and one year to maturity. a.~You estimate that the probability of stock price to go up is 90% and probability to go down is about 10%. Compute the price of call and put and also expected returns on the stock, call, put and a straddle (combination of a call and put with same strike of $30) using the binomial tree model. (6)