Calculate the one period european call option, Finance Basics

Assignment Help:

Question:

a) A bank lends you $1750 at an initial nominal yearly interest rate of 7.5% compounded semi-annually. However, the interest rate will rise to 9.2% after the first year. You repay $580 both after the first year and halfway through the second year and wish to repay the rest after the third year.

i. What is the effective interest rate of the first year?

ii. Calculate the final payment.

b) Consider the n periods stock option model where the nominal interest rate is r per period. Let be the initial price of the stock, and for i = 1,2,4, n, let S(i) be its price at i time periods later. Suppose that S(i) is either u S(i-1) with probability p or d S(i-1) with probability 1-p, where u=1.25 and d=0.8.

i. Give appropriate bounds for the nominal interest rate, in order to get risk-neutral probabilities.
ii. If r = 8%, what are the risk-neutral probabilities p and 1-p when S=$120?
iii. Calculate the one period European call option with strike price $105.
iv. Calculate the one period European put option with strike price $120.
v. Calculate the two period European call option with strike price $125.


Related Discussions:- Calculate the one period european call option

Compute the risk premium for the stock, Compute the risk premium for the st...

Compute the risk premium for the stock of Omega Tools if the risk free rate is 6%, the expected market return is 12%, and Omega's stock has a beta of .8.    Ome

Cash and bonus issue - dividend, Cash and Bonus Issue - Dividend For a...

Cash and Bonus Issue - Dividend For a firm to pay cash dividends, it should contain adequate liquid funds.Though, under conditions of liquidity and financial constraints, a fi

Venture Capital, In Term Sheets, what are the outcomes of Economics and Con...

In Term Sheets, what are the outcomes of Economics and Control?

Explain the both dividend yield and earnings yield, Explain the both Divide...

Explain the both Dividend Yield and Earnings Yield Dividend Yield: Dividend yield is the ratio of per share expected dividends, to current market price of share. Earnin

Finance, If you inherited $ 45,000 today and invested all of it in a securi...

If you inherited $ 45,000 today and invested all of it in a security that paid a 7 percent rate of return, how much would you have in 25 years?

Concentration banking, Concentration Banking Firms along with regional...

Concentration Banking Firms along with regional sales outlets can designate specific of these as regional collection centre. Customers during these areas are necessitated to r

Som120 project, Frequency distribution for amount charged with starting poi...

Frequency distribution for amount charged with starting point 1800, class width 1000. For income use starting point 20 and class width of 10.

Calculate the one period european call option, Question: a) A bank len...

Question: a) A bank lends you $1750 at an initial nominal yearly interest rate of 7.5% compounded semi-annually. However, the interest rate will rise to 9.2% after the first

Calculating cost of purchasing & prepare income, The Jacobs company needs t...

The Jacobs company needs to acquire a new lift truck for transporting its final product to the warehouse. One alternative is to purchase the truck for $45,000. Maintenance of th

Student., what type of assets does Intel own and the most significant asset...

what type of assets does Intel own and the most significant asset to the company and why?

Write Your Message!

Captcha
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