What is the risk-neutral probability

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Q1. The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. What is the risk-neutral probability that the stock price will be $36?

Q2. The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. There is a call option with a strike price of $32. What is the value of the option?

Q3. The current price of a non-dividend-paying stock is $40. Over the next year it is expected to rise to $42 or fall to $37. Assume the risk-free rate is 2% (continuously compounded). An investor buys put options with a strike price of $41. What is the value of each option?

Q4. The current price of a non-dividend paying stock is $30. Use a two-step tree to value a European call option on the stock with a strike price of $32 that expires in 6 months. Each step is 3 months, the risk free rate is 8% per annum with continuous compounding. What is the option price when u = 1.1 and d = 0.9?

Q5. The current price of a non-dividend paying stock is $40.08. Use a two-step tree to value an American put option on the stock with a strike price of $42.67 that expires in 6 months. Each step is 3 months, the risk free rate is 8% per annum with continuous compounding. What is the option price when u = 1.1 and d = 0.9?

Reference no: EM132781095

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