What are the call option values across the two states

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Reference no: EM132208212

Question - Use the two-state binomial option-pricing model with continuous compounding for the following questions

S0 = $100; X = $120, rf = 5.5%

The stock price will either increase to $150 (u=1.5) or decrease to $80 (d=0.8).

a) What are the call option values (Cu & Cd) across the two states?

b) What is the delta (ie., hedge ratio) for the call?

c) What is the probability (Pru) that the underlying stock price will experience the 'u' state?

d) Value the call using the risk-free approach.

e) Value the call using the risk-neutral approach.

f) Given the value of the call calculated above, what is the value of a put option, according to Put-Call Parity, with the same strike price and maturity date?

g) What are the put option values (Pu & Pd) across the two states?

h) What is the delta (ie., hedge ratio) for the put?

i) What is the probability (Pru) that the underlying stock price will experience the 'u' state? (Same as above).

j) Value the put using the risk-free approach.

k) Value the put using the risk neutral approach.

Reference no: EM132208212

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