The current price of XL Corporation stock is $40. In each of the next two years, this stock price can either go up by $15.00 or go down by $15.00.  XL stock pays no dividends.  The one-year risk-free interest rate is 15% and will remain constant.   Using the binomial pricing model, calculate the price of a two-year American put option on XL stock with a strike price of $40.

Question

The current price of XL Corporation stock is $40. In each of the next two years, this stock price can either go up by $15.00 or go down by $15.00.  XL stock pays no dividends.  The one-year risk-free interest rate is 15% and will remain constant.

 

Using the binomial pricing model, calculate the price of a two-year American put option on XL stock with a strike price of $40.

Expert Answer

Want to see the step-by-step answer?

Check out a sample Q&A here.

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

*Response times may vary by subject and question complexity. Median response time is 34 minutes for paid subscribers and may be longer for promotional offers.
Tagged in
Business
Finance

Financial Derivatives

Related Finance Q&A

Find answers to questions asked by students like you.

Q: Financial analysts forecast Limited Brands (LTD) growth rate for the future to be 12.5 percent. LTD’...

A: Gordon growth model states that the price or value of a stock can be determined if the firm continue...

Q: On March 9, 2009, the Dow Jones Industrial Average reached a new low at a close of 6,847.20, which w...

A: Calculate the return on stock market as follows:

Q: In​ 2007, interest rates were about​ 4.5% and inflation was about​ 2.8%. What was the real interest ...

A: Nominal Interest Rate = 4.5% or 0.045Inflation Rate = 2.8% or 0.028 Calculation of Real Interest Rat...

Q: NikkiG’s Corporation’s 10-year bonds are currently yielding a return of 6.80 percent. The expected i...

A: Current Yield = 6.80%Expected Inflation Premium (EIP) = 1.20%Risk-free Rate (RFR) = 2.10%Liquidity R...

Q: Suppose you have good credit and can get a 30 year mortgage for $100,000 at 5%.  What is your monthl...

A: Amount of Mortgage (pv) = $100,000Time Period = 30 yearsNumber of Payments in a Period = 12Total Num...

Q: Wheels, Inc. is a manufacturer of bicycles sold through retail bicycle shops in the southeastern Uni...

A: Alternative 1: Required Sales = XNumber of Salespersons required = 10Fixed Salary of Each Salesperso...

Q: what is the formula for compounding interest?

A: Compound interest can be defined as the interest earned on principal amount and on all previous inte...

Q: Ginger Brown has a take-home pay of $700 a week. Her disability insurance coverage replaces 70 perce...

A: Calculate the amount would she receive in disability benefits as follows:

Q: What are the key points to consider when describing a firm's payout?

A: Meaning of dividend pay-out:The pay-out ratio shows the share of earnings paid out to shareholders a...

Q: Suppose that you deposit $10 at the end of each day into a savings account that pays 2% interest com...

A: Accumulated value can be defined as the sum of investment and interest earned on investment over a s...

Q: You are a management trainee in one of the Manufacturing companies based in Johor, Malaysia. The com...

A: Value of the firm:Value of the firm is measured by using sum of value of firm’s equity and its debt....

Q: Guthrie Enterprises needs someone to supply it with 142,000 cartons of machine screwsper year to sup...

A: a) To calculate the NPV of the project, first depreciation, after tax salvage value is determined an...

Q: This year (10 years after you first took out the loan), you check your loan balance. Only part of yo...

A: Hi, there is some additional data missing the question. The total mortgage amount, interest rate, pr...

Q: With blank voting, all directors up for election are vorted on by the share holders at the same time...

A: With cumulative voting, all directors up for election are voted on by the share holders at the same ...

Q: Calculate the value of x for the cash flows below such that the equivalent total value in year 8 is ...

A: Equivalent value of a cash flow, Ct occurring at time t, at the end of year n = Ct x (1 + r)n - t wh...

Q: Automobiles had an average cost of $16,000 in 2013. Average cost of the same automobiles now is $20,...

A: Calculation of rate of increase for the automobiles between 2 time period: Rate of increase for the ...

Q: Suppose that 10 years ago you bought a home for $150,000, paying 10% as a down payment, and financin...

A: Calculation of Monthly Payment:The monthly payment is $710.04.Excel Spreadsheet:

Q: When Rachel borrowed $2400, she agreed to repay the loan in two equal payments, to be made 90 days a...

A: Suppose, the equal size payment to be made is P. Time period after which first payment has to be mad...

Q: ASDF Corporate Income Statement Current Year Units Sold 100,000 $37.84 $3, 784,000 $1,284,000 Unit P...

A: Hence, Combined leverage has a degree of 1.28, which is determined by dividing the difference of sal...

Q: What annual rate of return is earned on a $5,000 investment when it grows to $9,000 in five years? (...

A: Let r be the annual rate of return, earned on a $5,000 investment when it grows to $9,000 in five ye...

Q: Critically discuss the effect of increasing the amount paid upfront when corporations make capital p...

A: The company do not get charged a lower interest rate because of making huge down payment. Upfront pa...

Q: If the risk-free rate is 4.8 percent and the risk premium is 6.8 percent, what is the required retur...

A: Required Return: It is the rate of return which is the least satisfactory return an investor may ant...

Q: ERC is the largest logging  company in the United States. Their logging reserves are being depleted ...

A: The amount received by shareholders on periodic basis against providing equity to company is known a...

Q: Suppose that 10 years ago you bought a home for $150,000, paying 10% as a down payment, and financin...

A: Computation of the equity:Hence, the equity is $91,752.

Q: ncome Statement Bullseye, Inc.'s 2008 income statement lists the following income and expenses: EBIT...

A: earnings per share = EPS = Net income / Number of shares outstandingNet income = EBIT - Interest - T...

Q: I need help with this problem and putting into an excel format with formulas. You are looking into ...

A: Initial Investment = $38 MillionCalculation of the Net Present Value by using excel is as follows:

Q: Topic: Payout Policy What are the drawback(s) of distributing dividends instead of retained earnings...

A: The dividend policy is a decision in deciding the exchange between paying dividends and retaining ea...

Q: Compute the value in 35 years of a $1,500 deposit earning 8 percent per year. (Do not round intermed...

A: We need to use the concept of time value of money to solve the question. According to the concept of...

Q: A company wants to expand their manufacturing facilities . they have two choices ,first to expand th...

A: a)Determine the best option:The most financially beneficial option is option 1 expansion of current ...

Q: ​(Discounted payback period​) ​  Gio's Restaurants is considering a project with the following expec...

A: Calculation of Discounted Cumulative Cash Flow by using excel is as follows:

Q: You borrow $5000 at 10% per year and will pay off the loan in 3 equal annual payments starting one y...

A: Calculation of Payment at the end of Year 2:The interest payment is $348.94 and principal payment is...

Q: which ratio can be easily identifiable to maximize the value of a firm

A: Click to see the answer

Q: What is Calculation of Net Cash Flow?  Please provide example.

A: Net Cash Flow: It is the total amount of money created or lost over a particular timeframe, normally...

Q: What is 60 divided by 360 in decimal form

A: The decimal form is 0.166666666666667.Excel Spreadsheet:

Q: Give an example of mechanics of compounding.

A: Suppose principal amount is $20,000.Interest rate is 7% compounded annually.

Q: Question: Assuming the debt-equity ratio is 0.70, what is the value of the Microsoft? Which factors ...

A: Firm’s value represents the total value including market capitalization, debt (long-term and short-t...

Q: I am struggling with this problem as well and how to approach setting it up in excel. I'm using the ...

A: Initial Investment of New Product = Decrease in Firm’s FCFs of Current Year = $36 MillionCash Flow o...

Q: A manager believes his firm will earn a return of 16.35 percent next year. His firm has a beta of 1....

A: Calculation of Required Return:The required return is 14.68%.

Q: Round Hammer is comparing two different capital structures: An all-equity plan (Plan I) and a levere...

A: a) Calculation of EPS:Thus, the EPS for Plan I and Plan II are $3.38 and $2.90 respectively.

Q: Which of the following best explains why a firm that needs to borrow money would borrow at long-term...

A: The short-term rates of interest are much volatile when compared to the long-term rates of interest....

Q: Debt Management Ratios Trina's Trikes, Inc. reported a debt-to-equity ratio of 1.94 times at the end...

A: Debt to equity ratio = Debt / Equity = 1.94Debt = $ 10.60 million

Q: I am struggling with this problem as well. I'm using the Pearson Corporate Finance book 4th edition ...

A: Part (a)We will use the excel function NPV to calculate the NPV at a discount rate of 18%. Please se...

Q: What is the expected return for Big Tech Co. Stock given the following information? 3. Stock Expecte...

A: Expected return can be defined as the return which an investor expects to be generate on a project o...

Q: Nanometrics, Inc. has a beta of 2.01. If the market return is expected to be 12.50 percent and the r...

A: Required Return: It is the rate of return which is the least satisfactory return an investor may ant...

Q: A mining company in South Africa has discovered a new gold vein in a mountain 150 kilometers north o...

A: 1) To set up a new a mine in a mountain which is 150 kms north of Johannesburg, the company would sp...

Q: Four years ago, Bling Diamond, Inc., paid a dividend of $2.15 per share. The firm paid a dividend of...

A: Calculation of Cash Dividend:The cash dividend is $3.47.Excel Spreadsheet:

Q: I am currently working on some practice problems for my finance class and am unsure how to set up an...

A: As per the rule, I will do the first three parts. Since 1a is done will do 1b, 2 a and b.1b) Standar...

Q: Please solve #2 and #6   A corporation creates a sinking fund in order to have $860,000 to replace s...

A: Part 2 to 6:Excel Spreadsheet:

Q: Finance Question

A: Future value of a stream of annuity is given by the expression shown on the white board. Symbols hav...

Q: At age 18, Marcia started depositing $2000 per year at the end of each year into an account earning ...

A: Annuity, A = $ 2,000Rate of interest = r = 12%number of annuities, n = 8