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A stock index is currently trading at 50.00. The annual index standard deviation is 20 percent. Paul Tripp, CFA, wants to value two-year index options using the binomial model. To correctly value the options, he needs the formulas in Exhibit 1. The annual risk-free interest rate is 6 percent. Assume no dividends are paid on any of the underlying securities in the index.  Exhibit 1 formulas  U = estdev sqrt(delta t) D = 1/U last formula attached as a screenshot   Q.Please explain step by step, please also explain how to calculate the (delta t)

A stock index is currently trading at 50.00. The annual index standard deviation is 20 percent. Paul Tripp, CFA, wants to value two-year index options using the binomial model. To correctly value the options, he needs the formulas in Exhibit 1. The annual risk-free interest rate is 6 percent. Assume no dividends are paid on any of the underlying securities in the index.  Exhibit 1 formulas  U = estdev sqrt(delta t) D = 1/U last formula attached as a screenshot   Q.Please explain step by step, please also explain how to calculate the (delta t)

Accounting Information Systems
Accounting Information Systems
10th Edition
ISBN:9781337619202
Author:Hall, James A.
Publisher:Hall, James A.
Chapter9: Database Management Systems
Section: Chapter Questions
Problem 13RQ
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A stock index is currently trading at 50.00. The annual index standard deviation is 20
percent. Paul Tripp, CFA, wants to value two-year index options using the binomial
model. To correctly value the options, he needs the formulas in Exhibit 1. The annual
risk-free interest rate is 6 percent. Assume no dividends are paid on any of the
underlying securities in the index. 

Exhibit 1 formulas 

U = estdev sqrt(delta t)

D = 1/U

last formula attached as a screenshot

 

Q.Please explain step by step, please also explain how to calculate the (delta t)

 

T₁ = e-D U-D
Transcribed Image Text:T₁ = e-D U-D
Exhibit 2. Discount Factors 5.00% 6.00% 7.00% Period 1 0.95123 0.94176 0.93239 Period 2 0.90484 0.88692 0.86936 Period 3 0.86071 0.83527 0.81058 A: B: Construct a two-period binomial lattice for the stock index. Calculate the value of a European index call option with an exercise price of 60.00. C: Calculate 60.00. the value of a European index put option with an exercise price of
Transcribed Image Text:Exhibit 2. Discount Factors 5.00% 6.00% 7.00% Period 1 0.95123 0.94176 0.93239 Period 2 0.90484 0.88692 0.86936 Period 3 0.86071 0.83527 0.81058 A: B: Construct a two-period binomial lattice for the stock index. Calculate the value of a European index call option with an exercise price of 60.00. C: Calculate 60.00. the value of a European index put option with an exercise price of
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