Find the price of a two year 120 strike european call option

Assignment Help Financial Management

Reference no: EM131243672

Binomial tree: random interest rates II

A stock that pays no dividends has current price 100. In one year's time the stock price is 120 with probability 0.7, and 90 with probability 0.3. If the stock price at T = 1 is 120, then the price at T = 2 is 150 with probability 0.5, and 110 with probability 0.5. If the stock price at T = 1 is 90, then the price at T = 2 is 110 with probability 0.6, and 80 with probability 0.4. Annually compounded interest rates are 10%, except if the stock has price 120 at T = 1, in which case the interest rate from T = 1 to T = 2 is 20%.

(a) Draw the two-step binomial tree and give the value of the money market account at each state.

(b) Prove that the price Z(0, 2) at T = 0 of the ZCB with maturity T = 2 is

(d) What is the risk-neutral distribution of the random variable Z (1, 2) with respect to the numeraire that is the ZCB with maturity T = 2?

Reference no: EM131243672

Questions Cloud

Calculate the price of a two year 106 strike european put : Calculate the price of a two-year 106-strike European put using (i) a replication argument and (ii) risk-neutral expectation.

Prompting an appropriate message : Write a program in Java which should accept the following information from the user after prompting an appropriate message:

How does the self-fulfilling prophesy shape adjustment : The operational definition of maturity says that maturity is characterized by the ability to delay gratification and to plan for the future. In contrast immature behavior is characterized by the need for immediate gratification and an inability to..

Social media policies for sharing information : What challenges do corporations face with regards to social media? Do companies have social media policies for sharing information? Provide an example.

Find the price of a two year 120 strike european call option : Find the price of a two-year 120-strike European call option. - What is the risk-neutral distribution of the random variable Z (1, 2) with respect to the numeraire that is the ZCB with maturity T = 2?

What is the principle function of the system : What is the purpose of this chapter? What is the principle function of this system? What do these authors take for granted in reasoning through this issue? Should you accept these assumptions or question them?

Estimate the partial regression coefficients : From the following data estimate the partial regression coefficients, their standard errors, and the adjusted and unadjusted R2 values

Requirements and policies of the secure wireless network : State the requirements and general security policies that will drive your design of a secure wireless network at the SOHO. It should be about 5-10 sentences or bullet points.

What christian doctrine does this text illustrate : What Christian doctrine does this text illustrate, and what are three attributes of the Word (Logos) mentioned elsewhere in John's Prologue implicitly ascribed here to Jesus?(prolong of John)

User Account

All Pages