The volatility of non-dividend-paying stock

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Reference no: EM131584315

The volatility of a non-dividend-paying stock, whose price is $88, is 30%. The continuously compounded risk-free rate is 12% per annum for all maturities.

a) What are the values for u, d, and p with two-step binomial tree (each step is for 6-months)?

b) What is the value of a 1 year European call option with a strike price of $100 given by a twostep binomial tree?

c) Suppose a trader sells 20 call option contracts (2,000 call options). What position in the stock is necessary to hedge the trader’s position at the time of the trade? (Hint: Find delta for initial node and answer the question.

Reference no: EM131584315

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