You need to price a put option on the stock of APPLE with an exercise price of $50 and six months to expiration. The current stock price of APPLE is $52, the risk-free rate is 10% p.a. (c.c.) and the volatility of the stock price of APPLE is 30% p.a. APPLE will pay a dividend of $1 in exactly four months’ time. This put option is to be priced using a two-period binomial option pricing model, with three months in each period. QUESTION: Draw the two-period tree diagram for the adjusted stock price (that recognizes the impact of the dividend) of APPLE. Show the expiration date payoffs from the put option.

You need to price a put option on the stock of APPLE with an exercise price of $50 and six months to expiration. The current stock price of APPLE is $52, the risk-free rate is 10% p.a. (c.c.) and the volatility of the stock price of APPLE is 30% p.a. APPLE will pay a dividend of $1 in exactly four months’ time. This put option is to be priced using a two-period binomial option pricing model, with three months in each period. QUESTION: Draw the two-period tree diagram for the adjusted stock price (that recognizes the impact of the dividend) of APPLE. Show the expiration date payoffs from the put option.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section: Chapter Questions

Problem 2P

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