ZuoTi.Pro
Question

Use the risk neutral probabilities to calculate the value of a three-month American put with the...

Use the risk neutral probabilities to calculate the value of a three-month American put with the strike price 102 , and stock price is $100 now. In 1 month it can go 5% up or down. In the second month it can go 5% up or down. And in the third month it can go 5% up or down. Construct a binomial tree for this stock. The annual interest rate is 10% with continuous compounding. Calculate the put value at each node of the tree by comparing with early exercise value. Are there any nodes where you should early exercise the put?

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Search for: Months 105 110.25 115.7б25 All Reference Books 100 95 90.25 85.7375 Type text to ook upna variety ofreserch and r

0 0
Add a comment
Know the answer?
Add Answer to:
Use the risk neutral probabilities to calculate the value of a three-month American put with the...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Finance - Derivative Securities

    1) A stock price is currently $100. Over each of the next two six-month periods it is expected togo up by 10% or down by 10%. The risk-free interest rate is 8% per annum with continuouscompounding. What is the value of a one-year European call option with a strike price of $100?2) For the situation considered in the previous problem, what is the value of a one-year Europeanput option with a strike price of $100? Verify that the European call...

  • A stock price is currently $50. Over each of the next two three-month periods it is...

    A stock price is currently $50. Over each of the next two three-month periods it is expected to go up by 5% or down by 5%. The risk-free interest rate is 10% per annum with continuous compounding. What is the value of a six-month American put option with a strike price of $54? quations you may find helpful: required precision O.01+- 0.01)

  • Question 1 - 35 Points Consider a European put option on a non-dividend-paying stock where the...

    Question 1 - 35 Points Consider a European put option on a non-dividend-paying stock where the stock price is $15, the strike price is $13, the risk-free rate is 3% per annum, the volatility is 30% per annum and the time to maturity is 9 months. Consider a three-step troc. (Hint: dt = 3 months). (a) Compute u and d. (b) Compute the European put price using a three-step binomial tree. (c) If the option in (b) is American instead...

  • Question 17 ou a) A stock price is currently $60. Over each ofthe next two three-month...

    Question 17 ou a) A stock price is currently $60. Over each ofthe next two three-month periods it is expected to go up by 8% or down by 7%. The risk-free interest rate is 10% per annum with continuous compounding. What is the value of a six-month European call option with a strike price of $61? (3 marks) b) Based on the information in part (a), what is the value of a six-month European put option with a strike price...

  • A stock selling at $50 will either go up 20% or go down 10% each month...

    A stock selling at $50 will either go up 20% or go down 10% each month for the next 3 months. The risk-free rate is 12% per annum with continuous compounding. Assume that a European put option is available for a strike price of $55 and a maturity of 3 months. a. Use a 3-step binomial model to calculate the price of the put option.

  • A 9-month American put option on a non-dividend-paying stock has a strike price of $49. The...

    A 9-month American put option on a non-dividend-paying stock has a strike price of $49. The stock price is $50, the risk-free rate is 5% per annum, and the volatility is 30% per annum. Use a three-step binomial tree to calculate the option price.

  • 1. A stock price is currently $100. Over each of the next two six-month periods it...

    1. A stock price is currently $100. Over each of the next two six-month periods it is expected to go up by 10% or down by 10%. The risk-free rate is 8% per annum with continuous compounding. (a) What is the value of a one-year European call option with a strike price of $100? (b) What is the value of a one year European put option with a strike price of $100? (c) What is the value of a one-year...

  • 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 

  • Find the fair value of an European call option and an American put option using the...

    Find the fair value of an European call option and an American put option using the incoherent and coherent binomial option tree if the underlying asset pays dividend of 4 PLN in one and half month. The initial stock price is 60 PLN, the strike price of 58 PLN is expiring at the end of the third month, the continuously compounded risk-free interest rate is 10% per annum, and the stock volatility is 20%.

  • 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.

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT