How would it change if the up state were first observed

Assignment Help Financial Management

Reference no: EM131344138

Consider a stock, XYZ, whose current price is $100 with volatility equal to 60% per annum. XYZ does not pay dividends. The annual (not continuously compounded) risk free interest rate is 12%.

(i) Consider a standard European option on XYZ with 3 months to maturity and exercise price E=100. What is the Black-Scholes value of the call option?

(ii) What is the value of a put on XYZ with the same E and same time to maturity as the call?

(iii) The CBOE has recently approved the creation of a special European option on XYZ, which they are calling a "High-Five". This high-five, on expiration, gives the holder the right to sell the underlying stock (XYZ) for the highest stock price that occurred during the life of the option (inclusive of the date on which it was issued) minus $5.00. Assuming this option has a maturity of 3 months and there are four `trading periods' in this time period. What is the price of this High-Five? (Hint use the Binomial model and remember that the Binomial model uses the per period interest rate calculated on a simple compounding basis).

(iv) If you were to attempt to replicate this option with a position in the XYZ stock and risk free debt. what position would you initially construct? How would it change if the up state were first observed (context of this question is still the four period binomial model.

Reference no: EM131344138

Questions Cloud

Which one yielding higher cost of capital might be preferred : For this discussion, describe how financial managers would choose a capital structure that maximizes the value of the firm, and discuss a scenario under which one yielding a higher cost of capital might be preferred.

Research various decision-making process options : Research various decision-making process options and the advantages and disadvantages of each. Select a decision-making process, or design your own process using your research as a guide.

Discuss about the marketing metrics : Athletics Supreme is a company that has been in business about 10 years selling a variety of athletic equipment. They have observed the growing interest in sportswear and would like to expand their product offering to include a line of sportswear ..

What is the sustainable growth rate : Last year Lakesha’s Lounge Furniture Corporation had an ROE of 17.5 percent and a dividend payout ratio of 20 percent. What is the sustainable growth rate? What is the sustainable growth rate?

How would it change if the up state were first observed : Consider a stock, XYZ, whose current price is $100 with volatility equal to 60% per annum. XYZ does not pay dividends. The annual (not continuously compounded) risk free interest rate is 12%. What is the value of a put on XYZ with the same E and same..

Do you agree with the capabilities approach : Instead of just telling us your name, major, etc., please also share with us your idea of a "Good Society." Do you agree with the Capabilities Approach, as presented in Chapter 1

Which of three application transactions must be made atomic : Which of the three application transactions must be made atomic (e.g., specify transaction boundaries) to prevent possible lost update? Why and why not?

Explanation for one of the evidenced-based practices : Adding a detailed explanation for one of the evidenced-based practices (EBP) you have listed for each row. Use your originals to then select one to explain per category

What is the value if it is european option : A stock is presently selling for $100. over each of the next two months, the stock will either increase of decrease in value by 9%, and will not pay any dividends. The risk-free rate is 2% per month. What is the value of the option if it is an Americ..

User Account

All Pages