Reference no: EM132075087
Exercise 1. Consider a three period binomial model (one initial date and two steps) as in class. Let the initial stockprice be $100. Let the upward increments be u = 1:2 and the downward be d = :9. Thus, the up-up stateshould have Suu = u u S0 = 1:2 1:2 100 = 144 and so on. The risk free rate is ten percent per period.
The call option with strike price of $100 was priced in class.Exercise 1. Price the put option with strike price of $100 using replicating portfolios. Does put-call parityhold (remember the interest accrues in discrete steps)? Explain.
Exercise 2. Suppose we had a futures contract to buy one share of the stock at the nal date at price F0.The stock price today is S0. The stock price tomorrow will either be Su or Sd. There is a risk free bondthat gets rate r.
What premium should the futures contract have today?
In other words, use the binomialmodel to price this contract.In the market, F0 will be chosen so that the premium exchanged at date 0 is $0. What futures pricewould give that?
Use this to come up with the futures price at each node in the binomial tree in the previousproblem. At each of these states (0, u, or d) is the market in contango or normal backwardation?
|
What is the expected return of your portfolio of homer
: What is the expected return of your portfolio of Homer, Marge and Bart have expected returns of 3 per cent, 20 per cent and 5 per cent, respectively?
|
|
What is the overall tax rate on crocket pre tax income
: Jimmy's marginal ordinary tax rate it 34% and his marginal tax rate on dividends is 15%. What is the overall tax rate on Crocket and Company's pre tax income
|
|
Calculate the total cost of the home purchase
: Calculate the total cost of the home purchase. (Down payment plus principle (loan amount) plus interest plus PMI.)
|
|
How much of the value of the home
: Lynn still owns the home as of the end of 2015 and has no plans to sell it. How much of the value of the home is included in her 2015 gross income
|
|
What premium should the futures contract have today
: At each of these states (0, u, or d) is the market in contango or normal backwardation? What premium should the futures contract have today?
|
|
What is the bonds yield-to-maturity if a semiannual convert
: Kerby manufacturing corporation sells a zero coupon bond for $38 with 8 years to maturity. At maturity the company will pay the bond's holder $100.
|
|
What is the primary purpose of the money markets
: According to Holmstrom (2015), what is the primary purpose of the money markets and how is that purpose served by "over-collateralized" debt?
|
|
How will harris stock price change upon this announcement
: Suppose instead that Harris announces it will permanently retain the cash, and use the interest on the cash to pay a regular dividend.
|
|
How much of the joint cost should be allocated
: Budde produced 10,000 gallons of x15, which sells for $40 per gallon, How much of the joint cost should be allocated to x15
|