Use two-step tree to calculate the value of a derivative

Assignment Help Financial Management

Reference no: EM131020091

A stock price is currently $30. During each two-month period for the next four months it is expected to increase by 8% or reduce by 10%. The risk-free interest rate is 5%. Use a two-step tree to calculate the value of a derivative that pays off max[(30-S),0]^2 where S is the stock price in four months? If the derivative is American-style, should it be exercised early?

Please explain your answer.

Reference no: EM131020091

Questions Cloud

What do you expect the price of the bond to be in two years : You own a bond with the following features: 9 years to maturity, face value of $1000, coupon rate of 2% (annual coupons) and yield to maturity of 5.7%. If you expect the yield to maturity to remain at 5.7%, what do you expect the price of the bond to..

Loss with the terminal stock price for portfolio consisting : Draw a diagram showing the variation of an investor’s profit and loss with the terminal stock price for a portfolio consisting of One share and a short position in one call option. Two shares and a short position in one call option. One share and a s..

What is the percentage up and down movement : The current price of a non-dividend-paying biotech stock is $140 with a volatility of 25%. The risk-free rate is 4%. For a three-month time step: What is the percentage up movement? What is the percentage down movement? What is the probability of an ..

Calculate the return of sales : Assume you are given the following information for Flanders Company: Return on Assets (ROA): 11% Return on Equity (ROE): 20% Total Asset Turnover : 1.5x Calculate the Return of Sales for Flanders Company. a. 7.33% b. 13.33% c. 1.81% d. 8.5% e. 16.5%

Use two-step tree to calculate the value of a derivative : A stock price is currently $30. During each two-month period for the next four months it is expected to increase by 8% or reduce by 10%. The risk-free interest rate is 5%. Use a two-step tree to calculate the value of a derivative that pays off max[(..

Yield to maturity-duration of this bond : A bond currently sells for $1,000, which gives it a yield to maturity of 5%. Suppose that if the yield increases by 20 basis points, the price of the bond falls to $975. What is the duration of this bond?

The value at risk approach : The Value at Risk approach: Discuss whether the following statement is true or false: A multi-index model will predict returns better than a single-index model

Equity-performance based compensation for managers : As stockholders, we can not rely on the managers of our firm to always appropriately manage the company for us. Which of the following is not a mechanism for helping ensure that the managers of our firm more appropriately manage the company for us. e..

Which gives it a yield to maturity : A bond currently sells for $1,000, which gives it a yield to maturity of 5%. Suppose that if the yield increases by 20 basis points, the price of the bond falls to $975. What is the duration of this bond?

User Account

All Pages