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Aloha Beach Bum specialises in beachwear. Its current stock price is $28. There is a liquid market for Aloha’s options and both calls and puts are available for trading. The call strike price is $28 while the put strike price is $29. The stock price is expected to either increase by 6% or decrease by 4% every quarter. The expiry date of the option is in 180 days. The risk-free rate is 2.5% (per annum). Assume 360 days in a year and every quarter is 90 days.
Apply binomial model to calculate the following:
(a) The price of the call option.
(b) The price of the put option.
Determine the optimal mix of products in terms of maximizing contribution to profits for the period. Then, find the range of optimality for the profit coefficient of each variable.
Consider a European call option on Globex Industries. This security gives the holder the right to buy a share of Globex in one year (the expiration date) for a pre-specified price X called the strike price.
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