Steps in the binomial tree increases to very large number

Assignment Help Financial Management
Reference no: EM131866095

i) Using a four-step binomial tree calculate the price of a European nine month call option to buy 1 USD for 1 AUD (spend 10 minutes on this calculation). Prior to arriving at the lecture, using Bloomberg you identify the following information: 1 USD = 1.29 AUD, the volatility of the USD/AUD currency pair is 35% per annum, the US risk-free rate is 1.25% per annum with continuous compounding and the AUD risk-free rate is 1.50% per annum with continuous compounding. In addition, explain to students what happens when the number of steps in the binomial tree increases to a very large number.

ii) Using the same information as part i), estimate the price of an American nine month call option to buy 1 USD for 1 AUD.

Reference no: EM131866095

Questions Cloud

Capillary in the finger : Using the terms given below put each of the following vessels and structures in the order in which the blood travels through them from a capillary
Should meritocracy be a value espoused by higher education : Should meritocracy be a value espoused by higher education professionals? Why/why not?
What should be the three month forward exchange rate : Assume the interest rate in the United States is 8 percent and in New Zealand is 4 percent. What should be the 3 month forward exchange rate?
Explain in detail why it may take longer : Explain in detail why it may take longer for you to fight off the flu virus the first time this season than it would if you caught the same strain a second time
Steps in the binomial tree increases to very large number : Explain to students what happens when the number of steps in the binomial tree increases to a very large number.
Lower legs due to venous insufficiency : What is a physical exercise that they could do to help assist in increasing the blood flow back to the heart. explain your answer.
Explain what is the advertising and sponsorship : What is the difference between advertising and sponsorship? Explain what motivates a company to engage in a sponsorship opportunity rather than simply being.
Provide a complete description of the decision variables : Provide a complete description of the decision variables used along with their units and also label the constraints mentioned in the problem.
Equal is equal to market value of equity : Equity is worth $30 per share, and book value of equity is equal is equal to market value of equity.

Reviews

Write a Review

Financial Management Questions & Answers

  Maximum price the investor should pay for the stock today

An investor plans to buy a common stock and hold it for two years. The investor expects to receive $1.5 in dividend a year and $26 from the sales of the stock at the end of year 2. If the investor wants a 15% return (compound annually), the maximum p..

  What number of visits is required to break-even

You are considering a walk-in podiatry clinic. Your financial projections for the first year of operations are as follows Revenues (10,000 visits) $400,000 Wages and Benefits 220,000 Rent 5,000 Depreciation 30,000 Utilities 2,040 Medical Supplies 50,..

  Estimate present value of the tax benefits from depreciation

Your company is considering a new project that will require $767,000 of new equipment at the start of the project. The equipment will have a depreciable life of 8 years and will be depreciated to a book value of $143,000 using straight-line depreciat..

  The firms operating cash flow resulting from this project

What is the amount of the change in the firm's operating cash flow resulting from this project?

  Calculate depreciation tax shield in year four of project

Big Ben Inc. is considering a project that will require purchase of $875,000 in new equipment. Calculate the depreciation tax shield in year 4 of the project?

  Clearly outline alternative ways to finance corporation

Clearly outline the alternative ways to finance a corporation.

  Risk to evaluate capital budgeting projects

A small, family-owned corporation would be more likely to use the contribution-to-firm risk criteria rather than the systematic risk to evaluate capital budgeting projects. If the interest rate is positive, then the present value of an annuity due wi..

  Investment represents the difference between the investment

The net present value of an investment represents the difference between the investment's:

  Maximum amount pierre should be willing to pay for bond

what is the maximum amount Pierre should be willing to pay for this bond?

  Bond investments with stable dividend paying stocks

With interest rates so low, some investors have considered replacing bond investments with stable dividend paying stocks. First we’ll look at a bond. What discount rate gets you a Present Value close t o the trading price of $106?

  What was the approximate inflation rate

Your investments increased in value by 11.1 percent last year but your purchasing power increased by only 8.4 percent. What was the approximate inflation rate?

  The value of portfolio of treasury bonds

Explain why each of the independent statements below is false. A good explanation should be between two and four sentences for each part. A mutual fund manager is concerned that the value of a portfolio of Treasury Bonds (average maturity = 15 years)..

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