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A four-step binomial tree for the price of a stock St is to be calculated using the up and sown ticks given as follows:
u = 1.15 d = 1/u
These up and down movements apply to one-month periods denoted by Δ = 1. We have the following dynamics for Sv
Where up and down describe the two states of the world at each node.
Assume that time is measured in months and that t = 4 is the expiration date for a European call option Ct written on St. the stock does not pay any dividends and its price is expected (by "market participants") to grow at an annual rate of 15%. The risk-free interest rate r is known to be constant at 5%
(a) According to the date given above, what is the (approximate) annual volatility of St if this process is known to have a log-normal distribution?
(b) Calculate the four-step binomial trees for the St and the Ct.
(c) Calculate the arbitrage-free price C0 of the option at time t = 0,
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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