M 1 2 25 Points 2 3 4 5 Binomial Option Method The Current Price Of A Stock Is Below In 1 Year The Price Will Be Pu If 1 (54.17 KiB) Viewed 27 times
M 1 2 25 Points 2 3 4 5 Binomial Option Method The Current Price Of A Stock Is Below In 1 Year The Price Will Be Pu If 2 (39.92 KiB) Viewed 27 times
M 1 2 25 points 2 3 4 5 Binomial Option Method The current price of a stock is below. In 1 year, the price will be Pu if the price increases and Pd if the price decreases. The annual risk-free rate is below Using the binomial method, find the price of a call option on the stock that has the strike price listed below and expires in one year. 6 7 8 9 Please show work and answer questions completely to receive full credit. 10 11 12 13 14 15 16 Current Stock Price, P $53,00 Pu $57,00 Pd $ 48,00 risk-free rate 6% Strike price $ 54,00 time to expiration 1 year 17 18 19 20 21 a. Calculate the "up factor" or "u", which is the factor when multiplied by the current price results in Pu. (2 pts) 22 23 u 24 25 Calculate the "down factor" or "d", which is the factor when multiplied by the current price results in Pd. (2 pts) 26 d 27 28
2 d 20 c. Calculate the value of the call option if the price increases in year 1, or u. It equals Maxdo, Pu XX (2 pts) 30 11 Cu 11 d. Calculate the value of the call option if the price decreases in year 1, or Cd. It equals Micralo, pa - X? (2 pts) 14 15 cd JT e. Calculate the optimal number of shares, No. in our future hedge portfolio Use the equation (Cu-Cd)/( Pd) 2. 30 NS 40 1 f. If the market increases at a factor of u, calculate the Portfolio payoff, Puls) and subtract Cu to obtain the net portfolio payoff (3 pts) + Puis) net Cu net portfolio payoff 45 40 e. If the market decreases at a factor of d, calculate the Portfolio payoff, Po(s) and subtract Cd to obtain the ret portfolio pavol.3 pts) 51 Pd(NS) net Cd net portfolio payoff h. Both net portfolio payoffs should be the same. Now find the present value (PV) of the net portfolio puyol with daily compounding Use 365 days in a year. 5 points) Introduction 10 Accessibility investigate 54 Ready
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