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Consider a European put option on a non-dividend paying stock with a strike price $52 and expiration in 8 months. The current stock price is $50. The stock's volatility is 15%. Over each of the next two 4-month periods the stock price is expected to go up by 9% or down by 8%. The risk-free interest rate is 6% per annum with continuous compounding for all maturities.
(a) Use a two-step binomial tree to calculate the value of this European put option. Show your step-by-step workings. No need to draw a binomial tree in the answer field. Just show your calculations.
(b) Use the Black-Scholes-Merton model to calculate the value of this European put option. Show your step-by-step workings.
(c) Compare the results obtained in (a) and (b). Do you expect them to be identical? Why/why not?
(d) If this option is an American option rather than a European option (all else staying the same), briefly describe how you will value this option (no calculations needed) and why.
(e) What is the Black-Scholes-Merton delta of this European put option?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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