Calculate the return r over one month

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Reference no: EM132173192

Question - A binary call option pays $1 at expiry if the value of the underlying asset is greater than the strike price, and $0 otherwise. The current interest rate is 3% pa.

(a) Calculate the return R over one month.

(b) Calculate all state prices at expiry for a ten-step binomial model where each time step is one month and the underlying asset is S=20, K=19, u=1.090, d=0.9173. That is, calculate all Î(10, j) for j = 0, 1, . . . , 10.

(c) Use the state prices in part (b) to calculate the premium of a binary call option with strike price K = $16 and K =$35, expiry in ten months.

(d) Use the state prices in part (b) to calculate the premium of an option which pays $1 at expiry if the value of the underlying asset is greater K1 = $16 but less than K2 = $35.

Reference no: EM132173192

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