Calculate the price explicitly using a binomial tree

Assignment Help Corporate Finance

Reference no: EM132208235

Question - One-Step and Two-Step Binomial Trees for Option Pricing

Shares in XYZ Corporation sell today for $20. The risk-free rate is 3% (continuously compounded). In the next six months, XYZ shares will either increase in price by 30%, or decrease in price by 40%. In the following six months, XYZ shares will again either increase in price by 30%, or decrease in price by 40%. XYZ pays no dividends.

a. What is the price of a European call with strike price $19 and expiration in 1 year? Calculate the price explicitly using a binomial tree and the dynamic hedging/replicating method.

b. What is the price of a European put with strike price $19 and expiration in 1 year? Calculate the price explicitly using a binomial tree and the dynamic hedging/replicating method, and verify that put-call parity holds, together with your solution for (a).

Reference no: EM132208235

Questions Cloud

Should there be more or less government presence : Describe several situations, imagined or actual, where good policy intentions could work in your favor or could go astray.

Describe the hippa security requirement : Describe the HIPPA security requirement that could have prevented each security issue identified if it had been enforced.

How would liquidity premiums explain each of these situation : The 25-year spot rate is 5%. The 30-year is 6%. What if the 30-year rate is 4.85%-same question? How would liquidity premiums explain each of these situations

How each food getting strategy influence the way people live : Discuss the various ways that we get food (foraging, horticulture, intensive agriculture, and pastoralism) and how each food getting strategy influence.

Calculate the price explicitly using a binomial tree : What is the price of a European call with strike price $19 and expiration in 1 year? Calculate the price explicitly using a binomial tree

Does this mean that we can be a color-blind society : Considering the article "Thinking Anthropologically About Race," social scientists now understand race to be a cultural construction, not based on biology.

What are the solutions to women global inequality : What are the solutions to women's global inequality that she discusses and why is education so important? Address her question: "What is in it for you?"

Which parenting style or styles did your parents use : Parents demonstrate varying levels of warmth, expectations for adherence to rules, and openness of communication with children.

What cultural values shape your beliefs : What cultural values shape your beliefs? How would you know whether you have stepped outside a cultural norm with regard to the social clock?

User Account

All Pages