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Question:
A 9-month American put option with an exercise price of $1250 iswritten on a stock whose current price is $1245. The stock willdistribute a 0.5% cash dividend six months from now. The riskfreeinterest rate is 1% and the stock's volatility is 16% per annum.
a. Please use a three-step binomial tree to estimate the option value and the hedge ratio. (Hint: build the tree inspreadsheet to calculate the option value).
b. However, if everything else is the same, what percentagedividend would imply a price of $75 for the Americanoption? (Hint: use the tree in part a to find the correctpercentage dividend by trial and error.)
c. Also, if everything else is the same, what volatility wouldimply a price of $75 for the option? (Hint: as in part b)
Compute the equivalent annualized rate compounded (1) annually, (2) semiannually, (3) quarterly, (4) monthly, and (5) continuously.
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1. which of the following investments would have the highest future value at the end of 10 years? assume that the
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