Assignment-4 Fin 455
1. You are given the following information: (use continuous compounding).
Current stock price
$100
Strike price
$100
Annual Volatility (σ)
25%
Annual Risk-Free rate
5%
Time to maturity
3 months (0.25 years)
Time step (Δt)
1 month (1/12 years)
Up parameter (U)
Down parameter (D)
1/U
Compute the current value of a European call option.
2. A look back option is a call option that allows the holder to buy the stock at the minimum stock price that occurred over the period to expiration. Suppose, S0 = $129, U = 1.5, D = 0.5, and R = 1.1, use a 3-period binomial model and find the price of such a contract?
3. You are provided with the following information:
S0 = $129, X = $80, U = 1.5, D = 0.5, and R = 1.1
a) Compute the value of a call option using the two-period binomial model.
b) What are the hedge portfolios at t = 1 that help price the call option at that time?
c) Suppose the model price were correct, and the call option were priced in the market at $55. Show how one can make arbitrage profits.
4. Price a call option using the one-period binomial model assuming the following data:
S0 = 129, K=80, U=1.5, D=0.5 and R=1.1. What does the replicating portfolio consist of?
5. Use the data from problem 5, compute the put price and validate the put-call parity.
Collepals.com Plagiarism Free Papers
Are you looking for custom essay writing service or even dissertation writing services? Just request for our write my paper service, and we'll match you with the best essay writer in your subject! With an exceptional team of professional academic experts in a wide range of subjects, we can guarantee you an unrivaled quality of custom-written papers.
Get ZERO PLAGIARISM, HUMAN WRITTEN ESSAYS
Why Hire Collepals.com writers to do your paper?
Quality- We are experienced and have access to ample research materials.
We write plagiarism Free Content
Confidential- We never share or sell your personal information to third parties.
Support-Chat with us today! We are always waiting to answer all your questions.
