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St. Johns Inc. stock is currently selling for $25 and has a volatility of 25%. The 7-month risk-free rate is 3% with continuous compounding. Use a 7-step binomial tree to answer these questions.
a. Price a 7-month up-and-out call option with a strike of $26 and a barrier of $33
b. Price a 7-month up-and-in call option with a strike of $26 and a barrier of $33
c. Price a 7-month vanilla call option with a strike of $26
d. What is the relationship to the price of the three options?
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Your hospital has been approached by a major HMO to perform all their MS-DRG 470 cases (major joint procedures). They have offered a flat price of $10,000 per case. You have reviewed your charges for MS-DRG 470 during the last year and found the foll..
Repeat Problem for an American put option on a futures contract. Calculate u. d. and p for a two-step tree.
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