The current market share price of Belta Airlines plc is $20. Every month, the stock price is expected either to increase by a multiplicative factor u = 1.1, or decrease by d = 0.91. The relevant annual continuously compounded risk-free rate of interest is 6%. 2. (a) What, according to the binomial option pricing model, will be the price of a 3-month European put option on a share of Belta stock, with a strike price of £19.50? (b) What would the price of the put option was American style? If your answers to parts (a) and (b) differ, why do they differ?

The current market share price of Belta Airlines plc is $20. Every month, the stock price is expected either to increase by a multiplicative factor u = 1.1, or decrease by d = 0.91. The relevant annual continuously compounded risk-free rate of interest is 6%. 2. (a) What, according to the binomial option pricing model, will be the price of a 3-month European put option on a share of Belta stock, with a strike price of £19.50? (b) What would the price of the put option was American style? If your answers to parts (a) and (b) differ, why do they differ?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A stock price is currently $30. It is known that at the end of one year, it will be either $36 and $24. The exercise price of a one-year European call option is $32. The risk-free interest rate is 5% per annum. a. Construct a binomial tree to show the payoff of the call option at the expiration date. b. Based on the binomial tree model, what is the value of the call option?
The market price of JS stock is currently $30. It is known that at the end of three months it will be either $33 or $27. The risk-free interest rate is 8% per annum with continuous compounding. (a) Use a one-step binomial tree to calculate the value of a three-month European put option on the JS stock with a strike price of $31? Use no-arbitrage arguments (you need to show how to set up the riskless portfolio). (b) Use the same one-step binomial tree and your results from (a) to determine the price of a three-month American put option on the JS stock with a strike price of $31
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A stock has a current price of $67. An option on this stock that expires in six months has an exercise price of $65. The stock will pay a dividend of $5 in three months. Assume an annualized volatility of 30% and a continuously compounded risk - free rate of 5% per annum. Use the Black - Sholes - Merton model to price this option. 1) Suppose the option is a European put. Calculate the value of the put. 2) Suppose this option is an American call. Use Black's approximation to calculate the value of this call.
The current price of a stock is $20, and at the end of one year its price will be either $22 or $18. The annual risk-free rate is 2.0% (use daily compounding with 365 days/year), based on daily compounding. A 1-year call option on the stock, with an exercise price of $19, is available. Based on the binominal model, what is the option's value?(Please Show Work)
The current price of a stock is $22, and at the end of one year its price will be either $29 or $15. The annual risk-free rate is 3%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the option's value?
A stock price is currently $100. Over each of the next two 3-month periods, it will go up by 10% or down by 10%. The risk-free interest rate is 6% per annum with semiannual compounding. A (a) What is the value of a 6-month European call option with a strike price of $100? Calculate this directly using a two-period binomial tree and the delta-hedging approach.
A stock price is currently $80. Over each of the next two six-month periods, it is expected to go up by 6% or down by 6%. The risk-free interest rate is 5% per year with semi-annual compounding. Part I. Use the two-steps binomial tree model to calculate the value of a one-year American put option with an exercise price of $80. Part II. Is there any early exercise premium contained in price of the above American put option? If there is, what is the early exercise premium? Part III. Discuss how you can hedge risk if you write the above put option with an exercise price of $80 and 1-year maturity.
A stock has a price of $37 and an annual return volatility of 59 percent. The risk-free rate is 3.13 percent. Perform calculations in Excel. a. Calculate the European call and European put option prices with a strike price of $38.00 and a 90-day expiration. (Use 365 days in a year. Do not round Intermediate calculations. Round your answers to 2 decimal places.) Call premium Put premium b. Calculate the deltas of the European call and European put. (Use 365 days In a year. A negative value should be Indicated by a minus sign. Do not round Intermediate calculations. Round your answers to 4 decimal places.) Call delta Put delta
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A European put option on a non-dividend paying stock has strike price of $40 and time to maturity 9 months. Assume the risk-free interest rate is 5% per annum, the volatility is 20% per annum and the current stock price is $38. Using the Black-Scholes model, calculate the price of the European put option.
XYZ stock is currently traded at $40. Consider a put option on XYZ with $38 exercise price expiring in 6 months. Estimate the price of the option using two-period BOPM. Assume the stock price can go up by 10% and down by 15% each period (i.e., (6 months) / (2 periods) = 3 months). The annual risk-free interest rate is 6%. please use excel and show formulas. thanks!

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