What is the value of a european call option

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Question -

1. Suppose that The Warehouse currently trades at $2.04. The interest rate is 1% (with contentious compounding), and The Warehouse shares have a volatility of 18%. Set up a two step binomial tree for the stock, with each step representing three months.

(a) What is the value of a European call option with strike price $2.15, maturing in six months time?

(b) What is the value of a European put option with strike price $2.15 maturing in six months time?

2. A stock price is currently $25. The interest rate is 6% (with continuous compounding). Volatility is 12% per annum. In 12 months time, an exotic derivative pays off 1/S1, where S1 is the stock price after 12 months. What is the value of this derivative? Use a two step binomial tree to value it.

Reference no: EM132177262

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