Determine the two possible stock prices for the next period

Assignment Help Financial Management

Reference no: EM131928603

Consider a stock currently trading at 25 that can go up or down by 15 percent per period. The risk-free rate is 10 percent. Use one-period binomial model.

a. Determine the two possible stock prices for the next period.

b. Determine the intrinsic values at expiration of a European call with an exercise price of 25.

c. Find the value of the option today.

d. Construct a hedge by combining a position in stock with a position in the call. Calculate the hedge ratio and show that the return on the hedge portfolio is the risk-free rate regardless of the outcome, assuming that the call trading at the price obtained in part c.

e. Determine the rate of return from a risk-free hedge if the call is trading at 3.50 when the hedge is initiated.

Reference no: EM131928603

Questions Cloud

Probability of economy state of economy stock : Rate of Return if State Occurs State of Probability of Economy State of Economy Stock

What will be the new operating cash flow : What is the new degree of operating leverage? what will be the new operating cash flow?

European call option-what should be the value of derivative : Consider a European call option on a non-dividend-paying stock. What should be value of derivative that pays off $15 if stock price in 3 months exceed %50.

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

Determine the two possible stock prices for the next period : Determine the two possible stock prices for the next period. Find the value of the option today.

What is the variation margin : A trader buys a 90-day Eurodollar futures contract at 94.85. What is the variation margin? Assume the contract multiplier is $25/basis point.

What is the new monthly payment if couple refinances : What is the new monthly payment if the couple refinances?

Calculate the price of at the money call : If the risk-free rate of interest is 10%, calculate the price of an “at the money” call (with a strike price also of $50)?

What are the annual after-tax cash receipts : When computing the net present value of the project, what are the annual after-tax cash receipts? The net present value of the project is closest to:

User Account

All Pages