1. Suppose that, in each period, the cost of a security either goes up by a factor of u = 2 or down by a factor d = 1/2. Assume the initial price of the security is $100 and that the interest rate r is 0. c) Assuming the strike price of a European call option on this security is $90, compute the possible payoffs of the call option given that the option expires in two periods.
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1. Suppose that, in each period, the cost of a security either goes up by a factor of u = 2 or down by a factor d = 1/2. Assume the initial price of the security is $100 and that the interest rate r is 0.
c) Assuming the strike price of a European call option on this security is $90, compute the possible payoffs of the call option given that the option expires in two periods.
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- Suppose that, in each period, the cost of a security either goes up by a factor of 2 or goes down by a factor of 1/2 (i.e. u=2, d=1/2). If the initial price of the security is 100, determine the no-arbitrage cost of a call option to purchase the security at the end of two periods for a price of 150.The prices of a certain security follow a geometric Brownian motion with parameters mu=.12 and sigma=.24. If the security's price is presently 40, what is the probability that a call option, having four months until its expiration time and with a strike price of K=42, will be exercised? (A security whose price at the time of expiration of a call option is above the strike price is said to finish in the money.) If the interest rate is 8%, what is the risk-neutral valuation of the call option?Assume that the price of a forward contract is 127.87. The European options on the forward contract has an exercise price $150, expiring in 60 days. 3.75% is the continuously compounded risk-free rate, and volatility is 0.33. Using the Black-Scholes-Merton model, compute the price of a put option on the underlying asset.
- The prices of a certain security follow a geometric Brownian motion with parameters mu=.12 and sigma=.24. If the security's price is presently 40, what is the probability that a call option, having four months until its expiration time and with a strike price of K=42, will be exercised? (A security whose price at the time of expiration of a call option is above the strike price is said to finish in the money).Assume that the price of a forward contract is 127.87. The European options on the forward contract has an exercise price $150, expiring in 60 days. 3.75% is the continuously compounded risk-free rate, and volatility is 0.33.A. Using the Black model, calculate the price of a call option on a forward contract.B. Calculate the underlying asset's price. Using the Black-Scholes-Merton model, determine the price of a call option on the underlying asset. Should this pricing be any different from the one calculated in letter A? Explain your answer.C. Using the Black model, calculate the price of a put option on a forward contract.D. Using the Black-Scholes-Merton model, compute the price of a put option on the underlying asset. Should this pricing be any different from the one calculated in letter C? Explain your answer.I asked this question yesterday: Suppose that, in each period, the cost of a security either goes up by a factor of 2 or goes down by a factor of 1/2 (i.e. u=2, d=1/2). If the initial price of the security is 100, determine the no-arbitrage cost of a call option to purchase the security at the end of two periods for a price of 150. In the answer I got today the first step said: "We assume that the probability of moving up and moving down be 50% each, which means equal chances for both the movements. " I had learned that the risk neutral probability for the stock price to go up is: p=(1+r-d)/(u-d). In this particular problem, we'd have p=(1+0-.5)/(2-.5)=1/3. And so the probability going down would be 1-p or 2/3. Thus, my question is why weren't these probabilities used in the solution previously sent? And if they should be, what would be the new solution to the problem? Thank you for your help. I'm new to learning all of this and some of it is hard for me to understand.
- Consider a European call option and a European put option that have the same underlying stock, the same strike price K = 40, and the same expiration date 6 months from now. The current stock price is $45. a) Suppose the annualized risk-free rate r = 2%, what is the difference between the call premium and the put premium implied by no-arbitrage? b) Suppose the annualized risk-free borrowing rate = 4%, and the annualized risk-free lending rate = 2%. Find the maximum and minimum difference between the call premium and the put premium, i.e., C − P such that there is no arbitrage opportunities.Assume that the price of a forward contract is 127.87. The European options on the forward contract has an exercise price $150, expiring in 60 days. 3.75% is the continuously compounded risk-free rate, and volatility is 0.33. Using the Black model, calculate the price of a put option on a forward contract.The price of a certain security follows a geometric Brownian motion with drift parameter mu=.05 and volatility parameter sigma =.3. The present price of the security is 95. (a) If the interest rate is 4%, find the no-arbitrage cost of a call option that expires in three months and has exercise price 100. (b) What is the probability that the call option in part (a) is worthless at the time of expiration?
- Assume that the price of a forward contract is 127.87. The European options on the forward contract has an exercise price $150, expiring in 60 days. 3.75% is the continuously compounded risk-free rate, and volatility is 0.33. Calculate the underlying asset's price. Using the Black-Scholes-Merton model, determine the price of a call option on the underlying asset.Consider a European Call Option with a strike of 82. The current price of the underlying asset is 80, and the time to expiry is 5 months. The current market price of the option is 6.22. The risk-free rate is 4.1%. (b) You believe the true volatility is 28.4%. Is the option under-priced or overpriced? Hence what position should you take in option to make money. Explain. (Please provide Screenshots.)Calculate the implied volatility on a security given the following information: a call option on the security has a premium of 3.5p, the security itself is trading at 50p, the call has an exercise price of 51p and has 120 days to maturity, and the riskless interest rate is 12 per cent. Calculate the implied volatility on a security given the following information: a call option on the security has a premium of 3.5p, the security itself is trading at 50p, the call has an exercise price of 51p and has 120 days to maturity, and the riskless interest rate is 12 per cent.