Given a American put option, use a binomialtree with monthly steps h=1/12 that is steplength.Let S(0) =100 (Stock price)K= 110 (Strike price)r= 0.03 (Risk free-rate)T=1 (year)Volatility= 20%.Constructing a binomial tree?

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Answered: Given a American put option, use a…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter5: Financial Options

Section: Chapter Questions

Problem 5P

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An analyst has modeled the stock of a company using the Fama-French three-factor model. The market return is 10%, the return on the SMB portfolio (rSMB) is 3.2%, and the return on the HML portfolio (rHML) is 4.8%. If ai = 0, bi = 1.2, ci = 20.4, and di = 1.3, what is the stock’s predicted return?
Calculate the price of a put option on stock using a three-time-step binomial tree model. We know that the current stock price is $70, the strike price is $73, the volatility of the stock is 25%, the maturity of the option is 3 years, and the annual effective risk-free rate is 10%, yearly compounding. How much does this put option worth today if it is American? According to the Put-Call Parity, what should be the price of the European call option that is written on the same stock with the same expiration and the same strike price?
Suppose you are attempting to value a 1-year expiration option on a stock with volatility (i.e., annualized standard deviation) of σ = .40. What would be the appropriate values for u and d if your binomial model is set up using:a. 1 period of 1 year.b. 4 subperiods, each 3 months.c. 12 subperiods, each 1 month.
For a two-period binomial model, you are given: Each period is one year. The current price for a non dividend-paying stock is 20. u = 1.2840, where u is one plus the rate of capital gain on the stock per period if the stock price goes up. d = 0.8607, where d is one plus the rate of capital loss on the stock per period if the stock price goes down. The continuously compounded risk-free interest rate is 5%. Calculate the price of an American call option on the stock with a strike price of 22.
Consider a two - period binomial model, where each period is 6 months. Assume the stock price is $75.00, \sigma 0.35, and r = 0.05. An American call option with a strike price of $80 would be exercised early at what dividend yield? () (A) 5.0% (B) 7.0 % (C) 9.0% (D) Never exercise early
Suppose you are attempting to value a 1-year expiration option on a stock with volatility (i.e., annualized standard deviation) of σ = 0.34. What would be the appropriate values for u and d if your binomial model is set up using: 1 period of 1 year. 4 subperiods, each 3 months. 12 subperiods, each 1 month.
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Suppose Carol's stock price is currently $20. If the standard deviation of the continuously compounded returns (σ) on a stock is 60 percent per year. The annual risk-free rate is 12%, compounded every 6 months. A. Using one-step binomial tree, what is the current value of a six-month call option with an exercise price of $25?B. Using two-step binomial tree, what is the current value of a one-year put option with an exercise price of $25?
Suppose an investor shorts a straddle (a call option + a put option with the same strike price) with the following parameter values: S = 200, K = 250, σ = 0.30, RF = 0.05, q = 0, T = 5 years, and the interest rate, volatility, and the dividend yield are all given as annual values. Assuming that average daily returns are approximately zero, what is the 5% daily Delta-Gamma VaR of the short straddle position in dollars? Use 3 decimal places for your answer. (If you need to round the Gamma in an intermediate step, please use at least *6 digits*.)
Use the Black-Scholes Model to find the price for a call option with the following inputs: (1) current stock price is $30, (2) strike price is $35, (3) time toexpiration is 4 months, (4) annualized risk-free rate is 5%, and (5) varianceof stock return is 0.25.
In a binomial model, a call option and a put option are both written on the same stock. The exercise price of the call option is 30 and the exercise price of the put option is 40. The call option’s payoffs are 0 and 5 and the put option’s payoffs are 20 and 5. The price of the call is 2.25 and the price of the put is 12.25. a. What is the riskless interest rate? Assume that the basic period is one year. b. What is the price of the stock today?
You are given the following information. S=50, X=50, simple annual risk-free interest rate is 5%, standard deviation of monthly stock returns is 10%. What is the value of a one-year European call option using the three-period Binomial model?

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Given a American put option, use a binomial tree with monthly steps h=1/12 that is step length. Let S(0) =100 (Stock price) K= 110 (Strike price) r= 0.03 (Risk free-rate) T=1 (year) Volatility= 20%. Constructing a binomial tree?