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 initially priced at $2 above the arbitrage free price. Describe a trading strategy that is an arbitrage opportunity.
d) Try to automate the pricing of a European call option in a computer program where T, S0, u, d and K are variables.
Homework Answers
Add Answer to:
1) consider a CRR model T = 2, S0= $100 , S1 = $200 or S1 = $50 an associated European call optio...
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...
2. Consider the N-step binomial asset pricing model with 0 < d<1< u (a) Assume N-3....
2. Consider the N-step binomial asset pricing model with 0 < d<1< u (a) Assume N-3. Sİ,-100, r-0.05, u-1.10, and d-0.90. Calculate the price at time (b) If the observed market price of the option in part (a) is $25 give a specific arbitrage trading (c) Suppose you wish to earn a profit of $100,000 from implementing your arbitrage trading zero, VO, of the European call-option with strike price K = 87.00. strategy to take advantage of any potential mis-pricing....
A six-month European call option on a non-dividend-paying stock is currently selling for $6. The stock...
A six-month European call option on a non-dividend-paying stock is currently selling for $6. The stock price is$64, the strike price is S60. The risk-free interest rate is 12% per annum for all maturities. what opportunities are there for an arbitrageur? (2 points) 1. a. What should be the minimum price of the call option? Does an arbitrage opportunity exist? b. How would you form an arbitrage? What is the arbitrage profit at Time 0? Complete the following table. c....
PROBLEM 2. 14 pointsl European call and put options with exercise price $22.5 and expiration time...
financial
PROBLEM 2. 14 pointsl European call and put options with exercise price $22.5 and expiration time in six months are trading at $4.12 and $7.42. The price of the underlying stock is $19.32 and the interest rate is 4.15%. Find an arbitrage opportunity, describe the arbitrage strategy, calculate the arbitrage profit. Provide the details.
PROBLEM 2. 14 pointsl European call and put options with exercise price $22.5 and expiration time in six months are trading at $4.12 and $7.42....
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...
14. Note that the Black-Scholes formula gives the price of European call c given the time...
14. Note that the Black-Scholes formula gives the price of European call c given the time to expiration T, the strike price K, the stock’s spot price S0, the stock’s volatility σ, and the risk-free rate of return r : c = c(T, K, S0, σ, r). All the variables but one are “observable,” because an investor can quickly observe T, K, S0, r. The stock volatility, however, is not observable. Rather it relies on the choice of models the...
1. (5 marks) No-arbitrage option pricing. Suppose the current stock price is $20. A two state...
1. (5 marks) No-arbitrage option pricing. Suppose the current stock price is $20. A two state tree is defined such that after 3 months, the stock price may increase to $22 with probability 0.1 and decrease to $18 with probability 0.9. Consider a European call option with strike, K=$21 and expiry T=3 months. The no-arbitrage value of the call option for today is given as $0.633 and interest rate = 12%. Suppose the option value V* > 0.633. Devise a...
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...
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...
Consider European call and pit on a non dividend paying stock; both for T=1yr. The stock...
Consider European call and pit on a non dividend paying stock; both for T=1yr. The stock price is $45/share and k=$45/share for both options. The call premium is equal to the put premium c=p= $7/share. The annual risk-free rate is 10%. Use the put-call parity and show that there exist an arbitrage opportunity. Also, show the complete table of cash flows and P/L at the options expiration of a strategy that will create the arbitrage profit in Q2.
2. Consider the N-step binomial asset pricing model with 0 < d<1< u (a) Assume N-3. Sİ,-100, r-0.05, u-1.10, and d-0.90. Calculate the price at time (b) If the observed market price of the option in part (a) is $25 give a specific arbitrage trading (c) Suppose you wish to earn a profit of $100,000 from implementing your arbitrage trading zero, VO, of the European call-option with strike price K = 87.00. strategy to take advantage of any potential mis-pricing....
A six-month European call option on a non-dividend-paying stock is currently selling for $6. The stock price is$64, the strike price is S60. The risk-free interest rate is 12% per annum for all maturities. what opportunities are there for an arbitrageur? (2 points) 1. a. What should be the minimum price of the call option? Does an arbitrage opportunity exist? b. How would you form an arbitrage? What is the arbitrage profit at Time 0? Complete the following table. c....
financial
PROBLEM 2. 14 pointsl European call and put options with exercise price $22.5 and expiration time in six months are trading at $4.12 and $7.42. The price of the underlying stock is $19.32 and the interest rate is 4.15%. Find an arbitrage opportunity, describe the arbitrage strategy, calculate the arbitrage profit. Provide the details.
PROBLEM 2. 14 pointsl European call and put options with exercise price $22.5 and expiration time in six months are trading at $4.12 and $7.42....
1. (5 marks) No-arbitrage option pricing. Suppose the current stock price is $20. A two state tree is defined such that after 3 months, the stock price may increase to $22 with probability 0.1 and decrease to $18 with probability 0.9. Consider a European call option with strike, K=$21 and expiry T=3 months. The no-arbitrage value of the call option for today is given as $0.633 and interest rate = 12%. Suppose the option value V* > 0.633. Devise a...
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...
Most questions answered within 3 hours.
-
Create a 32-run crossed array design with six control factors
and two noise factors such that...
asked 41 minutes ago -
A 500g sample of sand from source A has the following amounts
retained on each sieve....
asked 43 minutes ago -
In
your own words, please explain the essay by John Keynes wrote "The
End of Laissez...
asked 42 minutes ago -
How are the matrix and pixels related? Why are smaller
pixels better for diagnostic quality?
asked 45 minutes ago -
2. An AC generator has 80 rectangular loops on
its armature. Each loop is 11 cm...
asked 47 minutes ago -
Please help me with this question. Consider Aldi’s current and
potential geographic markets (see Exhibit 4...
asked 49 minutes ago -
What are the main components of the fermentation process and
give an explanation of each? Include...
asked 1 hour ago -
Explain which types of cells in the body (belonging to which
organs, etc.) are sensitive to...
asked 1 hour ago -
A single cable supports an 703-kg elevator car. What is the
tension in the cable when...
asked 1 hour ago -
among the three different ways to link CSS specifications to an
HTML document (inline CSS, document...
asked 1 hour ago -
(1) Write the net ionic equation for the reaction that occurs
when equal volumes of 0.191...
asked 1 hour ago -
On the night of April 18, 1775, a signal was to be sent from the
Old...
asked 1 hour ago