Use risk-neutral approach to price the one-year call

Assignment Help Financial Management

Reference no: EM131931813

Part 1: You try to price the options on XYZ Corp. The current stock price of XYZ is $100/share. The risk-free rate is 5%. You project the stock price of XYZ will either be $90 or $120 in a year. Assume you can borrow or lend money at the risk-free rate. Use risk-neutral approach to price the 1-year call and 1-year put option on XYZ Corp with the strike price of $105.

Part 2: Fisher Black and Myron Scholes receive the 1997 Nobel Prize in Economic Science for their work on option pricing. Although the model is theoretically elegant and beautiful, it was not widely used to price options in real life because it calls for inherent volatility which is unobservable. However, given the dependability of risk-neutral approach, people today normally use risk-neutral approach to price the options first, then they employ Black-Scholes model to estimate the implied volatility. Based on the information given in the previous question (part 1) and the call option price you just calculated, estimate the implied volatility of XYZ Corp stock.

Reference no: EM131931813

Questions Cloud

One-year zero-coupon bonds and perpetuities : How much of its portfolio should it allocate to one-year zero-coupon bonds and perpetuities, respectively, if these are the only two assets funding the plan?

What is total rate of return on bond : Find the bond's price today and six months from now after the next coupon is paid. What is the total rate of return on the bond?

What is the rate of return to you as the equity investor : What will be the selling price of the company in three years. What is the rate of return to you as the equity investor

What is the real rate of return on investment : You recently purchased an investment that yields 8% per year. What is the real rate of return on this investment?

Use risk-neutral approach to price the one-year call : Use risk-neutral approach to price the 1-year call and 1-year put option on XYZ Corp with the strike price of $105.

Pocketed firm to engage in a price ware with levered rival : In a multiperiod model, how can it be profitable for a deep-pocketed firm to engage in a price ware with a levered rival?

What is the maximum growth rate the firm : What is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds?

What is booth additional funds needed for coming year : Booth’s after-tax profit margin is forecasted to be 5.00% and its payout ratio to be 60.00%. What is Booth’s additional funds needed (AFN) for the coming year?

Determine the tick size-dollar tick value and point value : Determine the tick size, dollar tick value, and point value for the following contracts

User Account

All Pages