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Suppose some stock currently selling for $80 will either increase in value over the next year to $100, or decrease in value to $64. The risk free rate over the period is 10% given annual compounding. [Let r denote the continuously compounded rate per year. Thus er×1 = 1.1.] A European call option on the stock with an exercise price of $85 matures in one period (1 year). If you want to price the option with a two-step binomial tree.
1. What are u and d?
2. What are the payoffs from the call in each state of the world?
3. What is the European call price at time 0?
4. What are the pseudoprobabilities of the up and down movements in the stock price?
5. What is the European put price at time 0?
6. What is the American put price at time 0?
At the current level of? production, a monopoly faces a demand curve with a price elasticity of 0.8. This means it should? __________. Consider a model where we attempt to evaluate the effect of certain variables on the price of sex services. Suppos..
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(a) What is the PW for each estimated value? What is the expected PW? (b) Compute the expected annual savings and expected PW.
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Find the equal annual payment series that would be equivalent to the following increasing series of payments if the interest rate is 12%.
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Namely, the husband is unhappiest when he is at the opera by himself, he is a little happier when he is with his wife at the opera, he is happier still when he is at the football game by himself, and he is the happiest if they are both at the footbal..
Snack food venders and beer distributors earn some monopoly profit in their local markets but see them slowly erode from various new substitutes.
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