Pricing and hedging

Assignment Help Financial Management
Reference no: EM13908978

'Pricing and Hedging' 12.20.

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 6 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.

Reference no: EM13908978

Questions Cloud

Find time-average fraction of time that the system is busy : Find the mean time between busy periods (i.e., the time until a new arrival occurs after the system becomes empty). Find the time-average fraction of time that the system is busy.
Case - cutting costs at elite financial services : Supplemental Case - Cutting Costs at Elite Financial Services, As Albert Johnson, Director of Compensation at Elite Financial Services, examines the annual budget, he is concerned about the rising cost of the healthcare insurance the company provi..
Number of filenames as command-line arguments : Write the script called checking that will take any number of filenames as command-line arguments and will print the names of those files that are readable and writeable text files.
How many pounds of material are used in the current period : For the current period, Kayenta Company's manufacturing operations yield a $ 4,000 unfavorable price variance on its direct materials usage.
Pricing and hedging : 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 6 months. Calculate u, d, and p for..
Create a simple shopping cart using cgi scripts : Your project is to create a simple shopping cart using CGI scripts. You'll have ample time to do your research and create scripts. Place all scripts in the zip file along with a text file containing the link to your website where the CGI resides.
Standard overhead charged to production : Alvarez Company's output for the current period yields a $ 20,000 favorable overhead volume variance and a $ 60,400 unfavorable overhead controllable variance.
How much interest was earned on the investment : Find the future value of a $160,000 Certificate of Deposit that pays compounded interest every six months at the rate of 4% per year. The CD has a term of 5 years. How much interest was earned on the investment?
Does good enhance the value of human life? : Does good enhance the value of human life?

Reviews

Write a Review

Financial Management Questions & Answers

  Evaluate generation project with the cash flows

Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows: Year Cash Flow 0 –$36,000,000 1 53,500,000 2 –11,000,000 Required: (a) If the company requires a 12 percent return on its investments, what is the NPV o..

  The internal rate of return for capital budgeting projects

The Internal Rate of Return for capital budgeting projects is best described as:

  Calculate the required rate of return on companys stock

Calculate the required rate of return on a company’s stock that has the following characteristics: (a) Constant Growth Rate: 5%, (b) Price: $25.00, and (c) Dividend (Has Been Paid): $5.00.

  Determine target weighted average cost of capital

Felicia & Fred’s executive board have asked you to complete a decision model for their intended refurbishment of the former mill building. In order to make an appropriate decision, the executive team has provided you with the following information re..

  What is the optimal capital budget

A firm has a WACC of 10% until it has raised $100 million. Beyond that the WACC is 12%. The firm has the following projects and associated costs: Project A has a cost of $50 million and an IRR of 14%; project B has a cost of $70 million and an IRR of..

  Situations like this influence firms decision to use payback

A firm has a $100 million capital budge. It is considering two projects that each cost $100 million. Project A has an IRR of 20 percent, and NPV of $9 million, and will be terminated after 1 year at a profit of $20 million, resulting in an immediate ..

  What investment accumulates more interest

What investment accumulates more interest--15% compounded semi annually, or 14% compounded daily?

  Sinking fund which earns an annual effective rate

Copernicus borrows $L and repays the principal by making ten annual payments at the end of the year into a sinking fund which earns an annual effective rate of 8%. The interest earned on the sinking fund in the third year is $85.57. Determine L

  What is the projects discounted payback period

A project requires an initial cash outlay of $40,000 and has expected cash inflows of $12,000 annually for 7 years. The cost of capital is 10%. What is the project’s discounted payback period? Show your work

  Higher operating leverage

In its 2009 annual report, The Coca-Cola Company reported sales of $30.99 billion for fiscal year 2009 and $31.94 billion for fiscal year 2008. The company also reported operating income (roughly equivalent to EBIT) of $8.23 billion in 2009 and $8.45..

  Inventory turnover ratio times

Universal Sports Supply began the year with an inventory balance of $89,000 and a year-end balance of $55,000. Sales of $690,000 generate a gross profit of $240,000. Inventory turnover ratio times

  About the bid price

Dahlia Enterprises needs someone to supply it with 130,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. You also need an initial investment in net working c..

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