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Short the portfolio as it would provide the way to borrow money at lesser interest than 12 %
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1. (5 marks) No-arbitrage option pricing. Suppose the current stock price is $20. A two state...
Q8-Part I (6 marks) The current price of a non-dividend-paying stock is $42. Over the next...
Q8-Part I (6 marks) The current price of a non-dividend-paying stock is $42. Over the next year it is expected to rise to-$44. or fall to $39. An investor buys put options with a strike price of $43. To hedge the position, should (and by how many) the investor buy or sell the underlying share (s) for each put option purchased? (6 marks) 08-Part II (9 marks) The current price of a non-dividend paying stock is $49. Use a two-step...
2. Arbitrage on the tree A stock that pays no dividends has price today of 100. In one year's tim...
2. Arbitrage on the tree A stock that pays no dividends has price today of 100. In one year's time the stock is worth 110 with probability 0.75, and 85 with probability 0.25. The one-year annually compounded interest rate is 5%. a) Calculate the forward price of the stock for a forward contract with maturity one year. (b) Calculate the price of a one-year European put option with strike 100. (c) Suppose you observe that the put option in part...
A 10-month European call option on a stock is currently selling for $5. The stock price...
A 10-month European call option on a stock is currently selling for $5. The stock price is $64, the strike price is $60. The continuously-compounded risk-free interest rate is 5% per annum for all maturities. a) Suppose that the stock pays no dividend in the next ten months, and that the price of a 10-month European put with a strike price of $60 on the same stock is trading at $1. Is there an arbitrage opportunity? If yes, how can...
1) consider a CRR model T = 2, S0= $100 , S1 = $200 or S1 = $50 an associated European call optio...
1) consider a CRR model T = 2, S0= $100 , S1 = $200 or S1 = $50 an associated European call option with strike price k = $80 and exercise time T = 2 assume that the risk free interest rate r = 0.1 a) draw the binary tree and compute the arbitrage free initial price of the European call option at time zero. b) Determine an explicit hedging strategy for this option c) Suppose that the option is...
Question 3 - 20 Points Consider a European call option on a non-dividend-paying stock where the...
Question 3 - 20 Points Consider a European call option on a non-dividend-paying stock where the stock price is $33, the strike price is $36, the risk-free rate is 6% per annum, the volatility is 25% per annum and the time to maturity is 6 months. (a) Calculate u and d for a one-step binomial tree. (b) Value the option using a non arbitrage argument. (c) Assume that the option is a put instead of a call. Value the option...
A stock that does not pay dividend is trading at $50. A European call option with...
A stock that does not pay dividend is trading at $50. A European call option with strike price of $60 and maturing in one year is trading at $10. An American call option with strike price of $60 and maturing in one year is trading at $15. You can borrow or lend money at any time at risk-free rate of 5% per annum with continuous compounding. Devise an arbitrage strategy. So I know that usually american calls are never exercised...
1. A 10-month European call option on a stock is currently selling for $5. The stock...
1. A 10-month European call option on a stock is currently selling for $5. The stock price is $64, the strike price is $60. The continuously-compounded risk-free interest rate is 5% per annum for all maturities. 1) Suppose that the stock pays no dividend in the next ten months, and that the price of a 10-month European put with a strike price of $60 on the same stock is trading at $1. Is there an arbitrage opportunity? If yes, how...
5. Consider a European call option on the stock of XYZ, with a strike price of...
5. Consider a European call option on the stock of XYZ, with a strike price of $25 and two months to expiration. The stock pays continuous dividends at the annual yield rate of 5%. The annual continuously compounded risk free interst rate is 11%. The stock currently trades for $23 per share. Suppose that in two months, the stock will trade for either S18 per share or $29 per share. Use the one-period binomial option pricing model to find today's...
Eagletron's current stock price is $ $10. Suppose that over the current year, the stock price...
Eagletron's current stock price is $ $10. Suppose that over the current year, the stock price will either increase by 96% or decrease by 51%. Also, the risk-free rate is 25% (EAR). a. What is the value today of a one-year at-the-money European put option on Eagletron stock? b. What is the value today of a one-year European put option on Eagletron stock with a strike price of $19.60? c. Suppose the put options in parts (a) and (b) could...
Eagletron's current stock price is $ 10. Suppose that over the current year, the stock price...
Eagletron's current stock price is $ 10. Suppose that over the current year, the stock price will either increase by 98% or decrease by 60%. Also, the risk-free rate is 25% (EAR). a. What is the value today of a one-year at-the-money European put option on Eagletron stock? b. What is the value today of a one-year European put option on Eagletron stock with a strike price of $19.80? c. Suppose the put options in parts (a) and (b) could...
Q8-Part I (6 marks) The current price of a non-dividend-paying stock is $42. Over the next year it is expected to rise to-$44. or fall to $39. An investor buys put options with a strike price of $43. To hedge the position, should (and by how many) the investor buy or sell the underlying share (s) for each put option purchased? (6 marks) 08-Part II (9 marks) The current price of a non-dividend paying stock is $49. Use a two-step...
2. Arbitrage on the tree A stock that pays no dividends has price today of 100. In one year's time the stock is worth 110 with probability 0.75, and 85 with probability 0.25. The one-year annually compounded interest rate is 5%. a) Calculate the forward price of the stock for a forward contract with maturity one year. (b) Calculate the price of a one-year European put option with strike 100. (c) Suppose you observe that the put option in part...
Question 3 - 20 Points Consider a European call option on a non-dividend-paying stock where the stock price is $33, the strike price is $36, the risk-free rate is 6% per annum, the volatility is 25% per annum and the time to maturity is 6 months. (a) Calculate u and d for a one-step binomial tree. (b) Value the option using a non arbitrage argument. (c) Assume that the option is a put instead of a call. Value the option...
5. Consider a European call option on the stock of XYZ, with a strike price of $25 and two months to expiration. The stock pays continuous dividends at the annual yield rate of 5%. The annual continuously compounded risk free interst rate is 11%. The stock currently trades for $23 per share. Suppose that in two months, the stock will trade for either S18 per share or $29 per share. Use the one-period binomial option pricing model to find today's...
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