General binomial method for option pricing

Assignment Help Financial Management
Reference no: EM131524346

Except where otherwise specified, all interest rates are stated as annual rates.

The general binomial method for option pricing has, at its root, the valuation of a one-period option on a stock with only two possible future values (by constructing a portfolio consisting of shares of the stock and borrowing that has the same value in period one as the option). Explain why this method provides a reasonable estimate of the value of an option. (Or, what assumptions must hold about the future value of an asset in order for the option price calculated using the binomial method to be true?)

Reference no: EM131524346

Questions Cloud

Discuss the simulation model : In the Monty Hall Problem, the host (Monty Hall) asks a contestant to choose one of three curtains. Behind one and only one of these curtains is a fabulous.
Who are upset about organizations monitoring their email : Take a position on the ethical concerns raised by employees who are upset about organizations monitoring their email or Internet access for security purposes.
A forensic psychologist in jury selection : Under what circumstance is it best to use a forensic psychologist in jury selection? Provide a case example to support your explanation.
Security management scoring guide : For this assignment, presentation in which you explore the security tasks that systems administrators should be knowledgeable about.
General binomial method for option pricing : The general binomial method for option pricing has, at its root, the valuation of a one-period option on a stock with only two possible future values.
The processes of visual perception help you to engage : Describe ways in which the processes of visual perception help you to engage in everyday activities, such as driving a car or preparing a meal.
Discuss security issues related to researched technologies : From the e-Activity, discuss two security issues related to the researched technologies. Analyze the security protection currently implemented on the device.
Should the firm purchase the new machine : The company’s marginal tax rate is 35% and it has a wacc of 12%. Should the firm purchase the new machine?
Solve the birthday problem : Use simulation to solve the Birthday Problem using the data file ObservedBirthDays.xls at www.cengagebrain.com.

Reviews

Write a Review

Financial Management Questions & Answers

  Evaluating two different cookie-baking ovens

You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $57,500, has a 5-year life, and has an annual OCF (after tax) of –$10,100 per year. The Keebler CookieMunster costs $90,500, has a 7-year life, and has an annual OCF (after..

  Calculate the term of a mortgage assuming an interest rate

Calculate the term of a mortgage assuming an interest rate of 7.75%, a monthly payment of $2,212.76, and an original loan amount of $280,000.

  After-tax net income difference in producing low calorie

Florida Citrus Inc. (FCI) estimates its taxable income at $9,000,000. The company is considering expanding its product line by introducing a low-calorie sport drink for next year. It expects that the additional taxable income next year from this spor..

  What is the required return for overall stock market

what is the required return for the overall stock market? what is the required rate of return on a stock with a beta of 0.8%.

  True of net working capital

Which of the following is true of net working capital?

  What is your bonds rate of return over the year

You buy a(n) 5.2% coupon, 6-year maturity bond for $943. A year later, the bond price is $1,048. Assume coupons are paid once a year and the face value is $1,000. a. What is the new yield to maturity on the bond (one year from now)? (Do not round int..

  Probability that the project will have a net present value

What is the probability that the project will have a negative net present value?- What is the probability that the project will have a net present value greater than $2.2 million?

  Calculate the fair market value of the equity capital

Suppose a firm’s free cash flows are expected to be $27,157 at the end of the current period and are expected to grow three percent each period thereafter. If the cost of capital is 11.8-percent per period and the market value of debt is $149,621, ca..

  The signing bonus is part of the contract value

An All-Pro defensive lineman is in contract negotiations. The team has offered the following annual salary structure with a signing bonus of $6,300,000 at time equals 0. All salaries are to be paid in a lump sum. The player has asked you as his agent..

  Which project is financially acceptable

Each project has a net investment outlay of $10,000 and the opportunity cost for each project is 12%.- Which project is financially acceptable.

  Firms use more debt in capital structure than other firms

It can be difficult to accurately forecast a project's cash flows because many risk factors may be present. As an analyst, what will you do to increase the accuracy of the project's cash flow forecasts? Some firms use more debt in their capital struc..

  Explore how should a business use working capital analysis

How should a business use working capital analysis? Which is more important to the short-term lender: the stock of cash or the flow of cash? Is it possible in today's business to operate with no current liabilities?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd