3. Consider a one-period binomial model with h = 1, S = 100, r = 0.08, u = 1.5, d = 0.8 and 80. Calculate the price of an American put option on this stock with strike price K = 100. Does early exercise occur?
Q: nswer the given question with a proper explanation and step-by-step solution. Please provide the…
A: When money is deposited in the banks then interest is accumulated over the period and that interest…
Q: The variance of the remains of securities A & B equals to 0.18 and 0.2 respectively. The coefficient…
A: Systematic risk, also known as market risk or non-diversifiable risk, is the inherent risk that…
Q: How long would it take to pay off the loan if she chooses the biweekly payments option?
A: First we need to determine the loan amount using the formula below:In a normal mortgage, the…
Q: The Sharpe ratio Select one: O is computed using idiosyncratic risk only O is computed using…
A: In finance in general and in the world of investments in particular we use several metrics and…
Q: How is duration related to the interest elasticity of a fixed-income security? What is the…
A: Duration is a fundamental concept in fixed-income finance and offers insight into the sensitivity of…
Q: Suppose the year 1, year 2 and year 3 forecasts for the rate of inflation in Denmark are 3%, 4% and…
A: Inflation rate in Denmark = 3% in year 1, 4% in year 2, 5% in year 3Inflation rate in France = 11%…
Q: Suppose you are an administrator in a hospital and you have been tasked with making a recommendation…
A: Equivalent Annual Cost (EAC) is a financial metric used to compare and evaluate different investment…
Q: Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that…
A: Correlation is a statistical measure that indicates how assets such as stocks move in relation to…
Q: Your uncle passed away and left you $10 million with the stipulation that it be invested in real…
A: Ira Our's investment proposal may seem enticing at first glance, promising a quick profit and a high…
Q: Suppose that you have inherited an annuity with the parameters given below. What is the present…
A: An annuity refers to a long-term investment contract between a person and an insurance company in…
Q: A woman paid $99,000 down for a house and agreed to pay 18 quarterly payments of $4,900 each. If…
A: Present value of annuity formula:-PV = A * where PV = Present value of annuityA = periodic paymentsr…
Q: 3.3 Suppose you buy theS&Rindex for $1000 and buy a 950-strike put. Construct payoff and profit…
A: The put-call parity states that profits from a portfolio of buying a stock/index and a put option…
Q: day is 1 July, 2022, Georg plans to purchase a corporate bond with a coupon rate of j2 = 6.96% p.a.…
A: Bonds are a source of investment and finance and bonds carry a coupon payment each period and par…
Q: When evaluating projects, we’re concerned with only the relevant incremental after-tax cash flows.…
A: Projects are evaluated using different capital budgeting techniques like NPV, IRR, MIRR, payback,…
Q: You are the CFO for Play Now sports and you have 2 different machines to consider for purchase. The…
A: YearsMachine IstMachine 2ndInitial…
Q: If a hat costs $4.20 after a 40% discount, what was its original price?
A: Discount means reduction in sales price of the product which is being sold to customer. It can be…
Q: Working capital management includes which of the following? 1. Controlling the inventory level II.…
A: Working capital management is a critical aspect of financial management for businesses and involves…
Q: The price of $100 par-value T-bond maturing in 15 years and paying a 7% coupon is 130. The bonds…
A: Underlying Asset: In the case of a Treasury bond futures contract, the underlying asset is the…
Q: IHNI is currently trading at $52.00 and pays a continuously com- ded dividend of 1.25%. The risk…
A: A call option is a financial contract that gives the holder the right, but not the obligation, to…
Q: What is the equivalent tax-exempt yield for a corporate bond yielding 9.00% given a marginal tax…
A: Variable in the question: Yield of corporate bond=9%Marginal tax rate=21%Requirement: Equivalent tax…
Q: Company Z is a computer manufacturing company that is considering diversifying into financial…
A: The capital structure of a corporation is defined as its funding mix, which includes both debt and…
Q: (Ignore financial distress for this question) Pisa Corporation is currently an all-equity firm that…
A: Value of Levered firm comprises the value of debt and value of equity. When a firm has both debt and…
Q: Given the following information, which of the following statements is most true? Spot Rate to…
A: According to the interest rate parity the spot rate and forward must be balanced by the interest…
Q: In terms of the stock valuation as indicated by the Cyclically Adjusted Price-Earnings Ratio (CAPE),…
A: The Cyclically Adjusted Price-Earnings Ratio (CAPE), often referred to as the Shiller P/E after…
Q: Jim and Joan Miller are borrowing $120,000 at 6.5% per annum compounded monthly for 30 years to…
A: A loan is a financial transaction where a lender provides a borrower with a specific amount of…
Q: Consider an American Put option with time to expiry of 5 months and a strike price of 82. The…
A: The binomial model is a mathematical model used in finance to value options. It assumes that the…
Q: EMU is in a bidding war with WMU to acquire Ypsi. • The current price of Ypsi stock = $65/share .…
A: Bidding refers to the process of selling an asset or even firm where prospective purchasers submits…
Q: How much interest is paid in total on a 3-year loan for $30 000? The interest rate is 8.7%…
A: When the borrower borrows a loan from the lender, he has to pay a rate of interest on the borrowed…
Q: Suppose that you invest $1,000 today at an annual rate of 11%. Assuming that the expected annual…
A: the concept we're discussing here is the effect of inflation on purchasing power and how it relates…
Q: Belgravia Petroleum Inc. is trying to evaluate a generation project with the following cash flows:…
A: Capital Budgeting is the technique for evaluating various projects in terms of profitability of the…
Q: d er Bartlett Batteries Inc. just paid an annual dividend of $0.68. If you expect a constant growth…
A: Dividend growth model is one of the model used for calculating expected stock price. It makes use of…
Q: An institutional investor is comparing management fees for two competing real estate investment…
A: Total fees charged for the fund A will be fees on capital commited @0.45% plus fees on capital…
Q: Which of the following statements regarding the U.S. bond market is INCORRECT? Group of answer…
A: The U.S. bond market is a complex and essential component of the global financial system. Serving as…
Q: IIIIIIIs (Cash Flow Reporting) Brockman Guitar Company is in the business of manufacturing…
A: Summary of the issue:Brockman Guitar Company is in the business of manufacturing top-quality,…
Q: Ketchup Corporation is currently trading at $40 per share. There are 0.5 million shares outstanding,…
A: Investment in shares refers to purchasing ownership units, or shares, of a company's stock with the…
Q: You are given the following information for Smashville, Inc. Cost of goods sold: $249,000…
A: Book value per share represents the ratio of common stock divided by the shares outstanding.
Q: You bought the following: a. 1000 shares of company A worth 100 pesos per share and will pay him 20…
A: Return on investment (ROI) is a financial metric that measures the profitability or efficiency of an…
Q: Compute for the Accrued Interest eld: 5% upon Rate: 4% -m: 3 Yrs equency: Semi-Annual ce Value:…
A: Accrued interest refers to the portion of interest that has accumulated but has not yet been paid or…
Q: Use the method of averages to find the approximate yield rate for the bond with the following…
A: Compound = Semiannually = 2Face Value = fv = $19,000Coupon rate = 7 / 2 = 3.5%Time = nper = 5 * 2 =…
Q: What is the beta of a portfolio comprised of the following securities? Stock Amount Invested…
A: Beta of portfolio comprising of 3 securities is computed as follows:-Bp =…
Q: Fairchild Garden Supply expects $730 million of sales this year, and it forecasts a 15% increase for…
A: Inventory turnover ratio is one of the efficiency ratioes used in business. This shows how…
Q: A medical doctor, 48 years old, is enrolled in a pension fund that will pay he $6,000 monthly at…
A: The Present Value refers to the discounted value of all future cash flows. All future cash flows are…
Q: You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $57,500, has a 5-year…
A: Variables in the question:Pillsbury 707:Costs =$57,500N= 5-yearAnnual operating cash flow…
Q: Pepsi Co has a stock which paid a dividend of $3 (DO). You expect the dividend will grow by 6% every…
A: A financial agreement or investment that offers a consistent stream of cash flows or payments that…
Q: You have an investment opportunity that promises to pay you $18,000 in four years. You could earn a…
A: There are 5 key elements in a TVM row of a financial calculator:"N" represents the total number of…
Q: Pertinent information for two alternatives A and B is shown below. If i=10%/year and income tax rate…
A: Companies invest money in projects in the hope there will be cash flows from the project in the…
Q: hat is an arbitrage opportunity? plain very briefly.
A: Arbitrage is risk free and a certain profit is available in the market due to the market not in…
Q: You have a $1,000 portfolio which is invested in stocks A, B, and a risk-free asset. $400 is…
A: A portfolio is a collection of stocks whose purpose is to provide the best return while at the same…
Q: A debt payment of $6200 is due in30 months. If money is worth 9.2% p.a. compounded quarterly, find…
A: Debt is a kind of loan which carries the interest to be paid on the maturity of the bond and debt is…
Q: A project requires the purchase of machinery for $40.000 The machinery belongs in a 20% CCA class…
A: NPV is the value added by a project and can be found in the difference between the present value of…
Step by step
Solved in 5 steps with 5 images
- 2. Derive the single - period binomial model for a put option. Include a single - period example where: u = 1.10, d = 0.95, Rf = 0.05, SO = $100, X = $100. 3. Assume ABC stock's price follows a binomial process, is trading at SO = $100, has u 1.10, d = 0.95, and probability of its price increasing in one period is 0.5 (q = 0.5). a. Show with a binomial tree ABC's possible stock prices, logarithmic returns, and probabilities after one period and two periods. . b. What are the stock's expected logarithmic return and variance for 2 periods and 3 periods? c. Define the properties of a binomial distribution.In this problem we assume the stock price S(t) follows Geometric Brownian Motion described by the following stochastic differential equation: dS = µSdt + o Sdw, where dw is the standard Wiener process and u = 0.13 and o = current stock price is $100 and the stock pays no dividends. 0.20 are constants. The Consider an at-the-money European call option on this stock with 1 year to expiration. What is the most likely value of the option at expiration? Please round your numerical answer to 2 decimal places.4. Valuation of a Derivative Consider a derivative on a stock with the time to expiration T and the following payoff: 0 K₁ 0 if ST K₁. What is the present value of the derivative? Provide an analytic expression of the price using N(), the cumulative probability distribution function of a standard normal random variable.
- Let S = $100, K = $95, \sigma = 30%, r = 8%, T = 1, and \delta = 0. For simplicity, let u = 1.3, d = 0.8 and n = 2 (that is, 2 periods). When constructing the binomial tree for the European call option, what is A (Stock Share Purchased in the replicating portfolio) at the first node (Time 0)? Question 11 options: 0.1789 0.3886 1.0000 0.2550 0.6912A share price is modelled via a two-period binomial model with initial stock price S=40, up/down multiplication factors u = per time period r = 4%. and d = and interest rate Explain Does this model satisfy the no-arbitrage assumption? Write 0 if your answer is 'no' and 1 if your answer is 'yes'. Answer: your argument in your hand-written answer (b) Calculate the risk-neutral probabilities of up and down movements in the share price. State your answer to three valid digits. Answer: P = Pd= (c) to three valid digits. Answer: Determine the no-arbitrage price of a European call option on the share with strike price K = 70 and expiry time T = 2. State your answer Explain your calculation steps in your hand-written answer.We consider a one-step binomial tree in which the parameters are u = 1.2, d = 0.8, r = 0.12, T = 0.25, fu = 3, fa = 0. Evaluate the followings: (1) Calculate the probability p of an up movement in a risk-neutral world. (2) Compute the current price f.
- A call option with X = $50 on a stock currently priced at S = $55 is selling for $10. Using a volatility estimate of σ = .30, you find that N(d1 ) = .6 and N(d2 ) = .5. The risk-free interest rate is zero. Is the implied volatility based on the option price more or less than .30? Explain.Consider the discrete-time binomial tree model with three periods of length 1, i.e. T = 3 and t = 0, 1, 2, 3. In each period the price can move up or down, St+1 is either uSt or dSt. Assume that the factor for moving up is u = 4/3, the factor for moving down is d = 3/4, and that the interest rate is r = 0.0. The initial stock price is So = 1. (a) Compute the price process (i.e. prices at all times and states) for a European Put option on the stock with strike price K = 1 and maturity T = 3. (x - ž) (b) Compute the price at time t = 0 of the Australian option K with ST K = 1. Note: As this option is path dependent, you will not be able to use the recursive method, nor will you be able to use the CRR formula.II. Suppose you have the following information concerning a particular options.Stock price, S = RM 21Exercise price, K = RM 20Interest rate, r = 0.08Maturity, T = 180 days = 0.5Standard deviation, = 0.5 a. What is correct of the call options using Black-Scholes model? b. Compute the put options price using Black-Scholes model? c. Outline the appropriate arbitrage strategy and graphically prove that the arbitrage is riskless.Note: Use the call and put options prices you have computed in the previous question (a) and (b) above.b. Name the options/stock strategy used to proof the put-call parity. c. What would be the extent of your profit in (a) depend on?
- Which of the following is true: The BSM model combined with the put call parity can be used to give the theoretical price of an American put option. One of the variables that influences the price of the option is the expected return on the stock. Since dividends could trigger an early exercise of an American call, the BSM formula dividend adjustment will provide the correct price of an American call. The BSM formula requires cumulative probabilities from the lognormal distribution. The BSM model may be used with currency options by replacing the dividend yield with the foreign interest rate.Consider a one-period model with N = {1,2,3} and two risky assets S1, S2 whose with current prices are 71 = 42 and 12 = 23 respectively. At time one, the price of S1 is believed to be either 44, 43, or 40 while the price of S2 is believed to be either 27, 22, or 20. Suppose that the risk-free interest rate is 3%. What is the unique risk-neutral probability measure Q in this situation? Select one: О а. Q(1) — 0.35, Q(2) — 0.27, Q(3) — 0.38 O b. Q(1) = 0.63, Q(2) = 0.34, Q(3) = 0.03 Ос. Q(1) — 0.25, Q(2) — 0.62, Q(3) — 0.13 O d. Q(1) = 0.35, Q(2) = 0.62, Q(3) = 0.031.Which of the following is assumed by the Black-Scholes-Merton model? A.The return from the stock in a short period of time is lognormal B.The stock price at a future time is lognormal C.The stock price at a future time is normal D.None of the above