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Consider a European call option on a non-dividend-paying stock where the stock price is $40, the strike price is $40, the risk-free rate is 4% per annum, the volatility is 30% per annum, and the time to maturity is six months.
a. Calculate u, d, and p for a two-step tree.
b. Value the option using a two-step tree.
c. Verify that DerivaGem gives the same answer.
d. Use DerivaGem to value the option with 5, 50, 100, and 500 time steps.
a. Calculate the expected rate of return on investments X and Y using the most recent year’s data. b. Assuming that the two investments are equally risky, which one should Douglas recommend? Why?
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Currently, a stock price is $51. Over each of the next 2 6-month periods it is expected to go up by 12% or down by 10%. The risk-free rate is 6% per annum with continuous compounding. What is the value of a 1-year European put option with a str..
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