please answer c) only Question 1. Consider a two-step binomial tree, where a stock that pays no dividends has current price 100, and at each time step can increase by 20% or decrease by 10%. The possible values at times T = 2 are thus 144, 108 and 81. The annually compounded interest rate is 10%. a) Calculate the price of a two-year 106-strike European put using risk-neutral probabilities. b) Calculate the price of a two-year 106-strike European put using replication. c) Calculate the price of a two-year 106-strike American put using replication, and hence verify that the American put has price strictly greater than the European. d) Calculate the prices of a two-year 86-strike European put and American put. What is different from part (c)?

please answer c) only Question 1. Consider a two-step binomial tree, where a stock that pays no dividends has current price 100, and at each time step can increase by 20% or decrease by 10%. The possible values at times T = 2 are thus 144, 108 and 81. The annually compounded interest rate is 10%. a) Calculate the price of a two-year 106-strike European put using risk-neutral probabilities. b) Calculate the price of a two-year 106-strike European put using replication. c) Calculate the price of a two-year 106-strike American put using replication, and hence verify that the American put has price strictly greater than the European. d) Calculate the prices of a two-year 86-strike European put and American put. What is different from part (c)?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 35QA

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Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

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please answer c) only

Question 1. Consider a two-step binomial tree, where a stock that pays no dividends has current price 100, and at each time step can increase by 20% or decrease by 10%. The possible values at times T = 2 are thus 144, 108 and 81. The annually compounded interest rate is 10%.

a) Calculate the price of a two-year 106-strike European put using risk-neutral probabilities.

b) Calculate the price of a two-year 106-strike European put using replication.

c) Calculate the price of a two-year 106-strike American put using replication, and hence verify that the American put has price strictly greater than the European.

d) Calculate the prices of a two-year 86-strike European put and American put. What is different from part (c)?

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Question 1. Consider a two-step binomial tree, where a stock that pays no dividends has current price 100, and at each time step can increase by 20% or decrease by 10%. The possible values at times T = 2 are thus 144, 108 and 81. The annually compounded interest rate is 10%. a) Calculate the price of a two-year 106-strike European put using risk-neutral probabilities. b) Calculate the price of a two-year 106-strike European put using replication. c) Calculate the price of a two-year 106-strike American put using replication, and hence verify that the American put has price strictly greater than the European. d) Calculate the prices of a two-year 86-strike European put and American put. What is different from part (c)?
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