Pricing and hedging, Consider a European call option on a

Pricing and hedging

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Reference no: EM13908978

'Pricing and Hedging' 12.20.

Consider a European call option on a non-dividend-paying stock where the stock price is $40, the strike price is $40, the risk-free rate is 4% per annum, the volatility is 30% per annum, and the time to maturity is 6 months.

(a) Calculate u, d, and p for a two-step tree.

(b) Value the option using a two-step tree.

(d) Use DerivaGem to value the option with 5, 50, 100, and 500 time steps.

Reference no: EM13908978

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