5. You note that Sony stock is selling at $25. Each month, it either goes up 10% or down 8%. The interest rate is 1% per month.
a. What is the value of a two-month call option to buy Sony at $26?
b. What is the value of a two-month put option with an exercise price of $26?
6. You note that platinum sells for $750 per ounce and know that it will sell for either $850 or $750 in one year. There are call options and put options for platinum. There are also futures markets for platinum. The safe rate of interest is10%. You can ignore all storage and transportation costs.
a. You observe a derivative contract (some unknown combination of calls, puts, written calls, written puts) that pays off $90 if platinum is selling for $850 in a year and pays off $110 if is selling for $750. In a competitive market with no arbitrage opportunities, what should the cost be for this derivative?
b. Also in a competitive market with no arbitrage opportunities, what should the futures contract for delivery of one ounce of platinum in one year be selling for today?
Binomial tree has been used to calculate the values of put and call options. Also a futures contract is valued.