Display the tree and verify that the option prices

Assignment Help Financial Econometrics
Reference no: EM131239460

A 1-year American put option on a non-dividend-paying stock has an exercise price of $18. The current stock price is $20, the risk-free interest rate is 15% per annum, and the volatility of the stock price is 40% per annum.

Use the DerivaGem software with four 3-month time steps to estimate the value of the option.

Display the tree and verify that the option prices at the final and penultimate nodes are correct. Use DerivaGem to value the European version of the option.

Use the control variate technique to improve your estimate of the price of the American option.

Reference no: EM131239460

Questions Cloud

Why do you think these are the best ways to analyze market : What are the best tools to use in this situation? Provide a brief summary of at least 2 of these tools. Why do you think these are the best ways to analyze the market? How will you use these tools in your plan?
Describe the sample space for the outcome of a visitor : evaluating web page designs.you are a web page designer and you set up a page with five different links .a user of the page can click on one of links or he or she can leave that page .describe the sample space for the outcome of a visitor to your ..
Divide the life of the option into four half month periods : A 2-month American put option on a stock index has an exercise price of 480. - Divide the life of the option into four half-month periods and use the tree approach to estimate the value of the option.
Evaluate how or why the business made such a mistake : Why is knowing (or estimating) the product demand so crucial for a firm? In your response, include an example of a business that has suffered from poorly estimating the demand of its products. Evaluate how or why the business made such a mistake.
Display the tree and verify that the option prices : Display the tree and verify that the option prices at the final and penultimate nodes are correct. Use DerivaGem to value the European version of the option.
Federal deposit insurance encourage greater risk : How does federal deposit insurance encourage greater risk taking by banks? Could the banking system function without government deposit insurance? How? How would you personally be affected if there was no federal deposit insurance? What would ..
Explain what recruiting is and why it is important : Write an introduction including the selected position, a preview of your paper, and a succinct thesis statement. Discuss the legal landscape, including special legal considerations that the company should be aware of.
Federal deposit insurance encourage : How does federal deposit insurance encourage greater risk taking by banks? Could the banking system function without government deposit insurance? How? How would you personally be affected if there was no federal deposit insurance? What would ..
Estimate the delta of the option from tree : Use a three-time-step tree to value a 9-month American call option on wheat futures. The current futures price is 400 cents, the strike price is 420 cents, the risk-free rate is 6%, and the volatility is 35% per annum. Estimate the delta of the op..

Reviews

Write a Review

Financial Econometrics Questions & Answers

  Determine the best order for the model

Determine the best order for the model. - Run a model of the order determined in question 1 and give the (directional) unit vectors found by the program. Comment.

  How many shares of stock will outdoor living need to sell

The underwriters estimate that the firm could sell additional shares of stock at $14.50 a share with a 7.5 percent underwriting spread. This would be a firm commitment underwriting.

  What is the amount of taxable income taxpayer should report

a taxpayer completes $500 of accounting servicesin Dec. 2012 for a client who pays him for the work in2013. What is the amount of taxable income he shoul report for 2012.

  What factors would want to consider in evaluating profit

What factors would you want to consider in evaluating profitability if you were a DVD movie and CD music retailer engaging in a price promotion strategy

  What volume is required to provied a pre-tax profit

Assume that a specialy group has the following cost structure and that the group expects to perform 7,500 procedures in the coming year: Variable cost per procedure $25

  What is the projects npv using the companys weighted cost

Essex Chemical's weighted cost of capital is 12 percent, and the new product line requires an estimated risk-adjusted discount rate of 17 percent, based upon the security market line and betas for comparable companies engaged

  Determine what is geometric return over the period

Your grandfather invested $1,000 in a stock 27 years ago. Currently the value of his account is $226,000. What is his geometric return over this period

  Should the old riveting machine be replaced by the new one

Galveston shipyards is considering the replacement of an eight year old riveting machine with a new one that will increase earnings before depreciation and taxes from $27,000 to $54,000 per year.

  Determine what is the companys cost of equity and debt

The company has one bond issue outstanding that matures in 23 years and has an 7.4 percent coupon rate. The bond currently sells for $970. The corporate tax rate is 28 percent.

  Determine what is the present value of the cash flow stream

A large networking company wants to incorporate your software into their systems and is offering to pay you $511,000 today, plus $511,000 at the end of each of the following six years for permission to do this.

  Who is responsible for monetary policy in canada

What political realities might explain the creation of the Bank of Canada in 1934? -  In what ways can the government influence the conduct of monetary policy?

  How many outcomes are there to given experiment

An experiment consists of rolling n (six-sided) dice and recording the sum of the n rolls. - How many outcomes are there to this experiment?

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!

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