ClassExerciseSolutions

# ClassExerciseSolutions - (1 \$2.25 g The time value of the...

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FIN459-659 In-class practice exercises Binomial Opton Pricing 1. You need to price the price of a common stock European Call option price one period before expiration. The assumptions that you will be using are: a. The current price of the common stock is \$25 per share. b. It is assumed that the price of the common can either go up 15% or down 12% in one time period. c. The risk free interest rate, is 5%. d. The option strike price is \$25. e. Using the above information Fnd: a) The possible prices for the common a period from now. (1) 28.75 and 22.00 b) The two possible "prices" for the call option one period from now. (1) \$3.75 and \$0.00 c) The number of call options you must "write" (sell) to construct a riskless portfolio. (1) 6.75 / 3.75 = 1.8 d) The value of the portfolio of common stock and options after one period. (1) \$22.00 e) The "hedge ratio" or number of shares of common stock per option written. (1) 0.56 f) The price of the call option today.

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Unformatted text preview: (1) \$2.25 g) The time value of the option today. (1) \$2.25 h) The intrinsic value of the option today. (1) \$0.00 2. Nothing else changes but the per period volatility of the stock returns. Now, the possible per period returns can be 25% or -20%. Solve for all the questions of problem 1 but using the new assumption. Once you are done calculating the answers to the question, repeat the exercise assuming that the current stock price moved by one dollar to \$25.1 per share. a. 31.25 and 20. b. 6.25 and 0.00 c. 1.8 d. 20 e. 0.56 f. 3.31 g. 3.31 h. 0.00 i. 31.375 and 20.08 j. 6.375 and 0 k. 1.772 l. 20.08 m. 0.564 n. 3.372 o. 3.372 p. 0.00 3. Keep the assumptions of problem 2 but this time price a European put option with one period to expiration and an exercise price of 25. For puts, you must "buy" them not write them. a. 31.25 and 20. b. 0.00 and 5.0. c. 2.25 d. 31.25 e. 0.44 f. 2.12 g. 2.12 h. 0.0...
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ClassExerciseSolutions - (1 \$2.25 g The time value of the...

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