To find the option price in a binomial tree, we need an assumption regarding the probability...
To find the option price in a binomial tree, we need an assumption regarding the probability of the increase/decrease in the stock price.
(a) True
(b) False
Homework Answers
The answer is true.
Binomial tree method is used for valuation of Options.This is the basic assumption in binomial tree is that the option value will have only two values (Outcomes) - either up or down. We have to evaluate the price of option considering the sensitivity in Stock Price.
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To find the option price in a binomial tree, we need an
assumption regarding the probability...
Part II (Binomial Tree) ai' 1. Compute the price of a call option using the stock...
Part II (Binomial Tree) ai' 1. Compute the price of a call option using the stock price tree u1.4634 and d=0.7317. The stock price is $38. The strike price is 840 and the interest rate is 8%. The time-period is 6 month. Use a 2 stage binomial tree 2. Assume that where ?-8%, the dividend yield ?. 0, ? is the annual standard deviation and ?VE is the standard deviation over a period of length h. The initial stock price...
5. Consider a binomial tree model for a stock price, S(n) as above. Find a probability...
5. Consider a binomial tree model for a stock price, S(n) as above. Find a probability value p, in the case when the risk free assest has a continuous compounding rate of r. What are the bounds on e', that is, what is the smallest and largest value it can be in terms of u and d which prevent arbitrage? S(n) is a stock price where K1)u with probability p and K(1d with probability 1-p and K(1). K(n) are independent...
A 1-year American put option on a stock is modeled with a 2-period binomial tree. Given that
A 1-year American put option on a stock is modeled with a 2-period binomial tree. Given that the price of the stock is 100, the strike price is 105. σ = 0.4. The continuously compounded risk-free rate is 6%. The stock pays no dividends.Determine the risk-neutral probability and the put premium
The put-call parity holds only when future stock price changes as described in a binomial tree....
The put-call parity holds only when future stock price changes as described in a binomial tree. (a) True (b) False
Using a binomial tree, what is the price of a $40 strike 6-month American put option,...
Using a binomial tree, what is the price of a $40 strike 6-month American put option, using 3-month intervals as the time period? Assume the following data: S=$37.90, r=5.0%, 5=35%, =0.
1. One assumption of the Black-Scholes model is that the underlying stock does not pay a...
1. One assumption of the Black-Scholes model is that the underlying stock does not pay a dividend. a. true b. false 2. The B/S model cannot be used to find the value of American put options. a. true b. false 3. The variable with the largest affect on the B/S model is the risk-free rate. a. true b. false 4. In equilibrium, the call option premium calculated using the B/S model should always equal the option premium calculated using the...
A 1-year European call option is modeled with a 1-period binomial tree with u = 1.2, d = 0.7.
A 1-year European call option is modeled with a 1-period binomial tree with u = 1.2, d = 0.7. The stock price is 50. The strike price is 55. The stock pays no dividends. The call premium is 3.10. σ = 0.25.Determine the risk-free rate
need help 10. The option holder must make the purchase at the option price, if the...
need help
10. The option holder must make the purchase at the option price, if the option is called. a. True b. False 8.Security valuation, if carefully done, avoids the need for input estimation a. True b. False
please draw a one step binomial tree to price a European call option with the following...
please draw a one step binomial tree to price a European call option with the following parameters: the time t =1 refers to one year Inputs: s = 50, k = 50, t = 1, v = 0.5, r = 0.05, y = 0, n = 1 Please Show all the steps in how to arrive at the answer
6. One of the assumption we have made is that the risk-free interest rate is constant....
6. One of the assumption we have made is that the risk-free interest rate is constant. In this problem, we will relax that assumption! Consider thoe following two period binomial model with a random interest rate rn. In this model, we define the risk-neutral pricing formula by 1+rn - d where p_- n1Tn Can you explain this formula?) Let V2 be a call option with expiration date t-2 and strike price K-7. a) Fill in the following binomial tree SIHH]...
Part II (Binomial Tree) ai' 1. Compute the price of a call option using the stock price tree u1.4634 and d=0.7317. The stock price is $38. The strike price is 840 and the interest rate is 8%. The time-period is 6 month. Use a 2 stage binomial tree 2. Assume that where ?-8%, the dividend yield ?. 0, ? is the annual standard deviation and ?VE is the standard deviation over a period of length h. The initial stock price...
5. Consider a binomial tree model for a stock price, S(n) as above. Find a probability value p, in the case when the risk free assest has a continuous compounding rate of r. What are the bounds on e', that is, what is the smallest and largest value it can be in terms of u and d which prevent arbitrage? S(n) is a stock price where K1)u with probability p and K(1d with probability 1-p and K(1). K(n) are independent...
Using a binomial tree, what is the price of a $40 strike 6-month American put option, using 3-month intervals as the time period? Assume the following data: S=$37.90, r=5.0%, 5=35%, =0.
need help
10. The option holder must make the purchase at the option price, if the option is called. a. True b. False 8.Security valuation, if carefully done, avoids the need for input estimation a. True b. False
6. One of the assumption we have made is that the risk-free interest rate is constant. In this problem, we will relax that assumption! Consider thoe following two period binomial model with a random interest rate rn. In this model, we define the risk-neutral pricing formula by 1+rn - d where p_- n1Tn Can you explain this formula?) Let V2 be a call option with expiration date t-2 and strike price K-7. a) Fill in the following binomial tree SIHH]...
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