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

Analysis, Inventories turnover 8 times 4 times Re...

Inventories turnover 8 times 4 times Receivable days 63 days 40 days

What are the financial intermediaries, What are the financial intermediarie...

What are the financial intermediaries? Financial Intermediaries: a. Mutual funds b. Pension funds c. Life insurance companies d. Banks

Traditional business of deposit taking and lending, Question 1: i) Disc...

Question 1: i) Discuss  the main risks facing a retail bank in its traditional business of deposit taking and lending? ii) How can a bank manage the risks related to credit

Determine the critical path and the expected completion, The information in...

The information in the table below is available for a large fund-raising project. a. Determine the critical path and the expected completion time of the project. b. Plot the

Solution to the agency conflict, Solution to the Agency Conflict The g...

Solution to the Agency Conflict The government can acquire the following actions to protect itself and its interests. 1. Acquire monitoring costs E.g. the gover

Draw a bar chart, The construction of a highway is broken into 14 activitie...

The construction of a highway is broken into 14 activities as shown in the following table. Draw a bar chart of this construction project. Activity ID Desc

What are the financial fluctuations, What are the financial fluctuations? ...

What are the financial fluctuations? Financial Fluctuations: a. Financial market fluctuations can be a basis of macroeconomic instability. b. Are markets irrational? c

Calculate the incremental net present value, The following NPV's have been ...

The following NPV's have been calculated to determine if a compressor installation should be accelerated from Year 3 to Year 7. The compressor cost is $1,500,000.   a. C

Setting of optimal cash balance, Setting of Optimal Cash Balance Cash ...

Setting of Optimal Cash Balance Cash is often identified like a non-earning asset since holding cash quite than a revenue-generating asset includes a cost in form of foregone

Illustrate the advantages of underwriting, Illustrate the Advantages of Und...

Illustrate the Advantages of Underwriting Underwriting presumes great significance as it offers the below benefits to the issuing company: (i) Issuing company is relied f

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