Purchase Solution

4-Step Binomial Model

Not what you're looking for?

Ask Custom Question

A stock that does not pay dividends trades for $25.

a. What is the value of a European call option on the stock with 4 months to maturity, if the volatility of the stock is 30% per annum, the strike price is $28 and the riskless rate is 10%?
b. What would be the value of the above option if you expected that the volatility of the underlying over the next 4 months would be 20%?
c. What position would you be willing to take on the option priced according to the data in a. given your expectations as stated in b?
d. What would be the replicating portfolio for the option when the volatility is 30% per annum?
e. Using put-call parity, compute the price of the corresponding European put if the volatility of the underlying is 30% per annum? What would be the value of the put option if it were American?

Purchase this Solution

Solution Summary

The solution calculates the value of European call option using Binomial tree.

Purchase this Solution

Free BrainMass Quizzes
Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Lean your Process

This quiz will help you understand the basic concepts of Lean.

Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.