At time 0.5, the price of $1 par of a zero maturing at time 1 will be either $0.96 or $0.98. The risk-neutral probability of the each outcome is 50%. The current price of $1 par of a zero maturing at time 0.5 is 0.97.

Time 0 Time 0.5
1
Zero maturing at time 0.5 0.97 0.96
Zero maturing at time 1 ?
1
0.98
What is the price at time 0 of the zero maturing at time 1 in the absence of arbitrage?
Multiple choice question. Pick one answer.

Question: Which of the two zeroes above has the higher true expected return from time 0 to time 0.5?

Answer 1: The 0.5-year zero.
Answer 2: The 1-year zero.
Answer 3: They have the same true expected return.
Answer 4: There is not enough information provided to tell.

The solution is very easy to understand and concise. It is an excellent response for students who want to understand the concepts and then use the same concepts to solve similar problems in the future. Overall, an excellent response. The solution provides the necessary steps which are easy to follow.

17. A stock price is currently $100. Over each of the next two three-month periods it is expected to increase by 10% or fall by 10%. Consider a six-month European call option with a strike price of $105. The risk-free rate is 8%. What is the risk-neutralprobability of a 10% rise in both quarters?
a. 0.10
b. 0.24
c. 0.3

13. Consider a six-month put option on a stock with a strike price of $32. The current stock price is $30 and over the next six months, it is expected to rise to $36 or fall to $27. The risk-free interest rate is 6%. What is the risk-neutralprobability of the stock rising to $36?
a. 0.365
b. 0.415
c. 0.435
d. 0.465

Chez Paul is contemplating either opening another restaurant or expanding its existing location. The payoff table for these two decisions is:
s1 s2 s3
New Restaurant -$80K $20K $160K
Expand -$40K $20K $100K
Paul has calculated the indifference probability for the lottery having a payoff of $160K with probability p and

In the following interest rate tree, solve for the risk-neutral probabilities at time 0 and time 0.5, using the equation: p=(dt/d½ - dt+1d)/(dt+1u-dt+1d), where d½ is the discount rate (DR) at time=t. In addition, what is the value at time 0 of an option that pays $1.35 at t=1 in the down-down state.
t=0 t

Company ABC currently has net assets worth $140 million and has issued $100 million in debt in the form of a zero-coupon bond that matures in one year. By looking at the equity market, we estimate that the volatility of the asset value is 30%. The risk-free interest rate is at 5%. Please find:
1) Equity value of the company acc

Please help with the following problem:
Assume that the dollar loss, L, associated with being robbed by a mugger on the street is $3, and that being robbed occurs with a probability of p. Suppose an individual can influence p by exercising caution, but doing so will be costly. Let the cost, C, required to achieve probabilit

1- In your work environment, identify a probability (either stated or assumed) that is a premise for making decisions and directing action. Potential candidates are customer or competitor behavior, technology or regulatory change, and "forces of nature" (severe weather, etc.) Describe how the probability has been used in decisio

Company XYZ must decide whether or not to introduce a new version of its product. The president thinks that the probability is 0.75 that the new version will be successful and 0.25 that it will not. If the product is a success, the company will gain $300,000. If it is a failure, the company will lose $150,000.
a. Constru