User Account

All Pages

Calculate the magnitude of upticks a and downticks

Assignment Help Finance Basics
Reference no: EM133001433

Consider applying the binomial method to price American options. Suppose that stock in the MAGA Hat Company is priced at So = 100 and consider options that are at the money K = 100. The options mature in T = 1 year, which we divide into 'n. = 3 periods, each of length At = % = %. The risk-free rate is r = 0.08 and MAGA stock has a volatility of or = 0.45.

(a) Calculate the magnitude of upticks a and downticks d, as well as the risk-neutral probability p.

(b) Draw the stock price tree and calculate the payoffs to call and put options at each ?nal price.

(c) Using backward induction, calculate the price of European call and put options.

(d) Verify that put-call parity holds for European options.

(e) Find the price of American call and put options. Is it ever worthwhile to exercise early?

(f) Does put-call parity hold for American options?

Reference no: EM133001433

Questions Cloud

Which investor interest for the year would be higher if the : Long term investment on January 1. Annual interest was received on December 31. The investor's interest for the year would be higher if the bond
What are the key issues that chase should consider : 1. What are the key issues that Chase should consider when designing a syndication strategy for its client?
Firm market value debt-equity ratio : -A firm has 10,000 perpetual bonds outstanding. The bonds have a par value of $1,000 and a coupon rate of 6 percent paid annually. The nominal interest rate on
Which debt investment must be presented in the statement : Which Debt investment must be presented in the statement of financial position? Which category includes debt securities at amortized cost?
Calculate the magnitude of upticks a and downticks : (a) Calculate the magnitude of upticks a and downticks d, as well as the risk-neutral probability p.
Building a comparable company analysis : Which of the following statements is most correct about building a comparable company analysis?
What was the company return on assets : You are evaluating a company's financial statements and see on the income statement that over the last year the company had $590 million in operating income, $7
Which type of annuity is most suitable in ashok situation : Ashok is 62 years old and has never married. He has no dependants or extended family. He has recently retired from a 25-year career as a nuclear scientist with
10-year segregated fund contract : What happens when a reset is done under a 10-year segregated fund contract?

Reviews

Write a Review

Finance Basics Questions & Answers

  Clearly explain to him the meaning of subprime debt

1) Clearly explain to him the meaning of 'subprime debt'? What are the risks and advantages of such financial instruments?

  Calculate the variance and standard deviation

a-1. Calculate the variance and standard deviation of each stock. a-2. Which stock is riskier if held on its own?

  What is the beta of the portfolio

Obi-wan forms an aggressive growth portfolio by investing 20% of his savings in GM stock, 21% in Nissan stock, 21% in Kia stock, 11% in an index fund

  Question regarding the giga balance sheet

Giga Corporation built a new headquarters for $800 million with an accounting life of 40 years. Assuming straight line depreciation, after 7 years

  Explain the excess burden of the subsidy

Calculate the present value of benefits minus costs when the social rate of discount is 10%. Dees the program merit approval? How would the present value of the net benefits change if the social rate of discount were 16%?

  Month forward premium-discount using european term

(a) Is Swiss Franc trading at premium or discount vs. USD in the forward market? (b) Calculate the 1-month forward premium/discount using European Term (30 days).

  What are the effects of low income

What are the effects of low income and low demand on the life and nonlife insurance?

  Describe the meaning of venture opportunity screening

Describe the meaning of venture opportunity screening.

  Improves the application of investment rules

Net present value is just a tool and as with any tool, it can be dangerous in the wrong hands. In what way do the risk based present value improves the application of investment rules?

  Find the amount of interest earned in the fifth year

Assume that delta t = 1/[10(1 + t)^2] and A(0) = 100. Find the amount of interest earned in the fifth year.

  Metal fabricators just issued 1000 par 20-year bonds the

metal fabricators just issued 1000 par 20-year bonds. the bonds sold for 758.18 and pay interest semi-annually.

  Which of the four merchandise mix constraints

Which of the four merchandise mix constraints are you concerned about? How will you address them? What criteria will you focus on as you select vendors?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd