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ABC is a non-dividend paying stock whose current price is $60. Its volatility is 20%. Over each of the next two 6-month periods the stock price is expected to go up by 15% or down by 13%. The risk-free interest rate is 10% per annum with continuous compounding for all maturities. There is a European call option which has a strike price of $62 and expires in 12 months.
(a) Use a two-step binomial tree to calculate the value of this European call option. Show your step-by-step workings.
(b) Use the Black-Scholes-Merton model to calculate the value of this European call option. Show your step-by-step workings.
(c) Compare the results obtained from the above two approaches and provide a brief comment.
(d) If this option is an American option rather than the European option (all else staying the same), briefly describe how you will value this option.
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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