The current price of Estelle Corporation stock is $ 23.00 In each of the next two years, this stock price will either go up by 18 % or go down by 18 %. The stock pays no dividends. The one-year risk-free interest rate is 8.0 % and will remain constant. Using the Binomial Model, calculate the price of a one-year call option on Estelle stock with a strike price of $ 23.00
High price=Current price*up move=23*1.18=27.14 | ||||||
Low price=Current price*down move=23*0.82=18.86 | ||||||
Risk neutral probability for up move | ||||||
q = (e^(risk free rate*time)-D)/(U-D) | ||||||
=(e^(0.08*1)-0.82)/(1.18-0.82)=0.73135 | ||||||
Call option payoff at high price (payoff H) | ||||||
=Max(High price-strike price,0) | ||||||
=Max(27.14-23,0) | ||||||
=Max(4.14,0) | ||||||
=4.14 | ||||||
Call option payoff at low price (Payoff L) | ||||||
=Max(Low price-strike price,0) | ||||||
=Max(18.86-23,0) | ||||||
=Max(-4.14,0) | ||||||
=0 | ||||||
Price of call option = e^(-r*t)*(q*Payoff H+(1-q)*Payoff L) | ||||||
=e^(-0.08*1)*(0.731353*4.14+(1-0.731353)*0) | ||||||
=2.8 |
The current price of Estelle Corporation stock is $ 23.00 In each of the next two...
The current price of Estelle Corporation stock is $ 23.00. In each of the next two years, this stock price will either go up by 16 % or go down by 16 %. The stock pays no dividends. The one-year risk-free interest rate is 8.0 % and will remain constant. Using the Binomial Model, calculate the price of a one-year call option on Estelle stock with a strike price of $ 23.00. The price of the one-year call option is...
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The current price of Estelle Corporation stock is $25.00. In each of the next two years, this stock price will either go up by 21% or go down by 21%. The stock pays no dividends. The one-year risk-free interest rate is 7.6% and will remain constant. Using the Binomial Model, calculate the price of a one-year put option on Estelle stock with a strike price of $25.00. The price of the one-year put option is $...