Draw the three-period stock tree

Assignment Help Accounting Basics
Reference no: EM131178206 , Length: 2500 Words

Question 1: Current stock price S is $22. Time to maturity T is six months. Continuously compounded, risk-free interest rate r is 5 percent per annum. European options prices are given in the following table:

Strike Price

Call Price

Put  Price

K1 = $17.50

$5.00

$0.05

K2 = $20.00

$3.00

$0.75

K3 = $22.50

$1.75

$1.75

K4 = $25.00

$0.75

$3.50

(a) What is the aim of a long (or bottom) straddle strategy? Create a long straddle by buying a call and put with strike price K3 = $22.50.

(b) What is the aim of a short (or top) strangle strategy? Create a short strangle by writing a call with strike price K3=$22.50 and a put with strike price K2=$20.

Question 2: (a) Why is the binomial model a useful technique for approximating options prices from the Black-Scholes model?

(b) Describe some applications and uses of this model.

Question 3: Consider the binomial model for an American call and put on a stock whose price is $60. The exercise price for both the put and the call is $45. The standard deviation of the stock returns is 30 percent per annum, and the risk-free rate is 5 percent per annum. The options expire in 90 days. The stock will pay a dividend equal to 3 percent of its value in 50 days.

(a) Draw the three-period stock tree and the corresponding trees for the call and the put.

(b) Compute the price of these options using the three-period trees.

(c) Explain when, if ever, each option should be exercised.

Question 4: Consider a stock with a price of $120 and a standard deviation of 20 percent. The stock will pay a dividend of $5 in 40 days and a second dividend of $5 and 130 days. The current risk-free rate is 5 percent per annum. An American call on this stock has an exercise price of $150 and expires in 100 days.

What is the price of the American call? Show all calculations.

Question 5: ABC is currently trading at $78 per share. Your previous calculation of the historical volatility for ABC indicated an annual standard deviation of return of 27 percent, but examining the implied volatility of several ABC options reveals an increase in annual volatility to 32 percent.

There are two traded options series that expire in 245 days as show in the following table:

 

X = 75

X = 80

 

Call

Put

Call

Put

DELTA

0.6674

-0.3326

0.574

-0.426

GAMMA

0.0176

0.0176

0.019

0.019

The options have $75 and $80 strike prices respectively. The current 245-day risk-free interest rate is 4.75 percent per annum, and you hold 2,000 shares of ABC.

Construct a portfolio that is DELTA - and GAMMA- neutral using the call options written on ABC. Show all calculations.

Verified Expert

What is the aim of a long straddle strategy.docx, This assignment is based on the drawing up of stock tree, computation of the price of the option, the calculation of the prices of the American call construction of the portfolio delta and gamma with use of the call options and the calculations made with respect to the same. The solution contains a brief explanation for each scenario and answer is provided with each and every step and detail summary, how to receive the answer for every problem, Ms word document file contains 2500 words count a detailed solution.

Reference no: EM131178206

Questions Cloud

What vulnerability assessment method did you use : What strengths did you find with regard to your selected critical infrastructure component? Explain in detail. What vulnerabilities did you find associated with your selected critical infrastructure component? Explain in detail.
Important component of project planning : Why is cost estimation such an important component of project planning? Discuss how this process related to the Work Breakdown Structure and the project schedule.
Description of each organized crime group : Select two organized crime groups (one with members of the same race and the other with members of different races) you want to research. Use your textbook readings and the Argosy University online library resources to research the two groups.
Alternative perspectives from experts on technology : Provide alternative perspectives from experts on technology Political implications and influences Public opinion on technology such as the media, consumers and community
Draw the three-period stock tree : Consider the binomial model for an American call and put on a stock whose price is $60. The exercise price for both the put and the call is $45. Draw the three-period stock tree and the corresponding trees for the call and the put
Organizations allocation of resources : Imagine you are an administrator for a health care organization and have been asked by your stakeholders to determine how the organizations allocation of resources will be impacted by new health care laws.
Improving workers-patients safety in a healthcare setting : The title of the project is: Improving Workers and Patients' Safety in a Healthcare Setting.
How do local agencies implement law enforcement policies : What changes to law enforcement came about as a result of the U.S. Supreme Court's decision in your chosen case? What did law enforcement have to do differently as a result of that decision? Discuss the practical implications.
Determine the vertical displacement dc of joint c : The truss ABCD shown in the figure is loaded by a vertical force P at joint Band by a horizontal force P at joint C. The axial rigidity of every member is EA. Determine the vertical displacement δc of joint C. (Hint: Add a vertical load Q at joint..

Reviews

inf1178206

8/27/2016 1:48:40 AM

Greatttt........ Perfect solution on time. Sorry for my curiosities, i'm much satisfied. Will see you soon with my new task.

inf1178206

8/27/2016 1:47:06 AM

I have seen the solutions of the part work, it has been done very well and I do believe your team does a really good job for every client.

inf1178206

8/27/2016 1:46:17 AM

wow. that's cool. I believe that I will not hesitantly contact your team in the future. I wonder to know. One is that how to make a price for a theoretical assignment, for example that my assignment is a '2000 words' essay assignment, how to make a price and the same question for the mathematical assignment. Another question is that do such kinds of solutions have a risk to be check out a plagiarism under the university's systems. And please forgiving that I am so over-curious and suspicious.

inf1178206

8/27/2016 1:44:52 AM

I wonder to know that whether your team can only solve the assignment like the mathematical assignment, or your team can also solve the assignment like the theoretical assignment? In addition, I do believe that I ask more help from your team in the future if your team provide me a really good solution.

Write a Review

 

Accounting Basics Questions & Answers

  The warbler jeans company produces two different types of

the warbler jeans company produces two different types of jeans. one is called the simple life and the other is called

  Need to access budget information

Determine that there need to access budget information from the senior accountant to explain to the team and will have to explain the overall financial objective of the business provide an overview of the budget and explain how the budget translat..

  Charmaine corporation has 75880 shares of common stock

charmaine corporation has 75880 shares of common stock outstanding. it declares a 2.4 per share cash dividend on

  Calculating cost of equity

Calculating Cost of Equity The Dybvig Corporation's common stock has a beta of .85. If the risk-free rate is 5.2 percent and the expected return on the market is 12 percent, what is Dybvig's cost of equity capital?

  Describe how these companies changed their disaster

Describe how these companies changed their disaster recovery plans after the terrorist attacks.

  At the completion of the darby department store audit the

at the completion of the darby department store audit the president asks about the meaning of the phrase in conformity

  Compute the required purchases for april

Palermo Wholesalers is preparing its merchandise purchases budget. Budgeted sales are $400,000 for April and $475,000 for May. Cost of goods sold is expected to be 60% of sales.

  Amount of income tax expense as a separate item

Provincial Inc. reported the following before-tax income statement items: Provincial has a 30% income tax rate. Provincial would report the following amount of income tax expense as a separate item in the income statement:

  Jimenez enterprises issued 9 8-year 2600000 par value bonds

jimenez enterprises issued 9 8-year 2600000 par value bonds that pay interest semiannually on october 1 and april 1.

  Explain the similarities and differences between job order

Explain the similarities and differences between job order costing and process costing.  In your explanation, provide examples of when job order costing and process costing would be most appropriate. Your initial post should be 200 to 250 words.

  Determine linear system of equations

where x1, x2,x3, andx4 are the fraction of the components, and CP1, CP2, CP3, and CP4 are the corresponding heat capacities. A mixture of unknown quantities of the four gases, SO2,SO3,O2,and N2, has been provided to our laboratory. In order to deter..

  Imposes a tax on the operation of slot machines

Can Iowa charge a higher maximum rate to racetrack owners than it does to riverboat owners without violating the equal protection clause of the U.S. Constitution?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd