Question

Question 13 (1 point) Suppose SO = 100 and stock tree is below, rf=0, p=0.45 t=0 t=1 t=2 110.25 105.0 100.0 100.0 95.3 90.7 b) Compute payoffs for a call (with $105 strike, expires t=2) if S-100 at t-2? 0 1 0-5 Question 14 (1 point) Suppose SO = 100 and stock tree is below, rf=0 (risk free rate), p=0.45 (risk-neutral probability). Call option with strike 105. t=0 t=1 t=2 110.25 105.0 100.0 95.3 90.7 100.0 c) Compute C_u (call price at the node {S=105, t=1})? Hint: work backward from t=2, treat it as a one-period call. 1) stock price can only go to 110.25 or 100 from 105 2) compute call payoffs for the two terminal states 3) find present value under risk-neutral probability (p) at the node {S=105, t=1} 4) rf =0 so no need to compute PV 00 0 2.4 5.25 02.9

Answer 1

!13)

Strike price is $105

Spot price at t2 = $100

Holder of the call has the right to buy the stock at the strike price

He will exercise the option only when the strike price is less than the spot price at the time of exercising the option

he will not exercise the option here because spot price is less than strike price

Payoff will be calculate as follows

Payoff = Max( spot price - strike price,0)

= Max ( 100-105, 0)

= 0

As per HomeworkLib guideline it is required to answer the first question hence question 14 has not been solved