Same time to maturity as the call

Assignment Help Financial Management

Reference no: EM131354656

Consider a stock, XYZ, whose current price is $100 with volatility equal to 60% per annum. XYZ does not pay dividends. The annual (not continuously compounded) risk free interest rate is 12%.

(i) Consider a standard European option on XYZ with 3 months to maturity and exercise price E=100. What is the Black-Scholes value of the call option?

(ii) What is the value of a put on XYZ with the same E and same time to maturity as the call?

(iii) The CBOE has recently approved the creation of a special European option on XYZ, which they are calling a "High-Five". This high-five, on expiration, gives the holder the right to sell the underlying stock (XYZ) for the highest stock price that occurred during the life of the option (inclusive of the date on which it was issued) minus $5.00. Assuming this option has a maturity of 3 months and there are four `trading periods' in this time period. What is the price of this High-Five? (Hint use the Binomial model and remember that the Binomial model uses the per period interest rate calculated on a simple compounding basis).

(iv) If you were to attempt to replicate this option with a position in the XYZ stock and risk free debt. what position would you initially construct? How would it change if the up state were first observed (context of this question is still the four period binomial model.

PLEASE SHOW TO CONSTRUCT THE BINOMIAL MODEL/TREE.

Reference no: EM131354656

Questions Cloud

Historical stages of organizational design theory : The historical stages of organizational design theory and philosophy have transmuted from the ancient church and military models of vertical structure based on discipline and authority to a modern horizontal structure for the purpose of encouragin..

Utilization of health care services : Analyze the factors that drive people to seek health care and determine which have the biggest impact on you. Provide specific examples to support your response.

Calculate the amount of money that will accumulate : Future value) Leslie? Mosallam, who recently sold her? Porsche, placed 10,200 in a savings account paying annual compound interest of 77 percent. Calculate the amount of money that will accumulate if Leslie leaves the money in the bank for 33?, 77?, ..

Research on a topic related to module learning objectives : Short Requirement (S/R) Discussion activities require you to do some brief research on a topic related to module learning objectives, then post an original primary response that summarizes your findings. Two substantial replies to your peers' resp..

Same time to maturity as the call : Consider a stock, XYZ, whose current price is $100 with volatility equal to 60% per annum. XYZ does not pay dividends. The annual (not continuously compounded) risk free interest rate is 12%. What is the value of a put on XYZ with the same E and same..

Estimate the power generated and the rotor speed : A high-speed two-bladed wind turbine 35 m in diameter operates at its peak effi- ciency in winds of 30 km/hr. Estimate the power generated, the rotor speed, and the wind velocity in the wake.

What kind of lan will your team design for the company : It has already decided to use the Windows Server 2003 network operating system. What kind of LAN will your team design for this company?

Difference between working and leading : Explain the difference between working and leading. How will you handle the new level of responsibility with the kitchen staff?

Develop a flowchart : Develop a flowchart [as in Figure and Example] showing all the steps involved in planning a party. Arnold Palmer Hospital has undertaken a series of process improvement initiatives

User Account

All Pages