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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
(c) Find the price of a two-year 120-strike European call option.
(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?
What is the required return for Dentrix Corporation? The risk-free rate is 2.7%, the risk premium is 7.7, the expected rate of inflation is 3.4% and the company can currently issue bonds at a YTM of 4.9%. The company's beta is estimated to be 0.9. Ro..
If 8% is a reasonable discount rate, which option is less costly. - What discount rate would cause the two alternatives to have the same cost in present value terms.
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Which of the following will lead to a decrease in financial leverage?
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A pension plan is obligated to make disbursements of $1 million, $2 million, $5 million and $1 million at the end of each of the next four years, respectively. Find the duration of the plan’s obligations if interest rates are flat at 10% annually.
"On May 19, 2015, the Dow Jones Industrial Average set a new high. The index closed at 18,312.39, which was up 13.51 points from the previous day's close of 18,298.88. What was the return (in percent to four decimal places) of the stock market for Ma..
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