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Calculate the time value of the put

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Reference no: EM133011273

Question - You calculated the following values for a two-year in-the-money American put with $5 intrinsic value on a non-dividend paying stock currently trading at $97: Su = $116.40 Sd = $82.45

Assume n = 2, the risk-free rate is 7% per annum, and the stock is expected to grow at the same rate for the next two years.

(a) Calculate the stock prices after two years.

(b) Calculate p and (1 - p) rounding them to two-digit after decimal.

(c) Calculate Pu2, Pud, Pd2, Pu, and Pd.

(d) Calculate current price of the put.

(e) Calculate the time value of the put, the initial and subsequent hedge ratios, and the rate of return for a hedged portfolio if the stock goes down after one period.

Reference no: EM133011273

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