Determine the price today of the option

Assignment Help Financial Management

Reference no: EM131326099

Consider a European call with an exercise price of 50 on a stock priced at 60. The stock can go up by 15 percent or down by 20 percent each of two binomial periods. The risk-free rate is 10 percent. Determine the price today of the option.

Then construct a riskfree hedge of long stock and short option. At each point in the binomial tree, show the composition and value of the hedge portfolio and demonstrate that the return is the same as the risk-free rate.

On any revisions to the hedge portfolio, make the transactions (buying or selling) in stock and not options. You can borrow any additional funds required at the risk-free rate, and any excess funds should be invested at the risk-free rate.

Reference no: EM131326099

Questions Cloud

Why does amazon have pricing models : Why does Amazon have 3 pricing models? What are the advantages of providing 3 pricing models? Please explain scenario's for each of the pricing model (please provide scenario's for each pricing model)

Determine the possible prices of the call at expiration : Find the stock price sequence.- Determine the possible prices of the call at expiration. Find the possible prices of the call at the end of the first period.

Find the value of the call : Its stock pr=is 0.90. The stock pays a dividend at the end of the first period at the rate of 0.06. Find the value of the call.

Explain how health care organizations use secondary data : Write a paper comparing and contrasting the collection of secondary data and their uses versus the analysis of current health care records and internal data such as incident reports and patient surveys. Explain how health care organizations use secon..

Determine the price today of the option : The stock can go up by 15 percent or down by 20 percent each of two binomial periods. The risk-free rate is 10 percent. Determine the price today of the option.

How will systems receive ip addresses explain : Determine the hardware to be used and the installation options. How will users log onto the systems? Explain.How will systems receive IP addresses? Explain. How will DNS be accessed by the LSDG systems? Explain

Discuss a product whose price you have seen change : Pricing is controlled by the manufacturer or producer of the product or service. The manufacturer or producer understands the competition (competitive activity), the consumer and their own company requirements.Discuss a product whose price you have..

Calculate the p and h : Consider three call options identical in every respect except for the strike price of $90, $100, and $110.- Use a one-period binomial model with u = 4/3 and d = 3/4. Calculate the p and h. Explain?

What is the minimum line of credit that cbm will need : Will the company need any outside financing? What is the minimum line of credit that CBM will need? What do you think of CBM's cash position during the budget period?

User Account

All Pages