wk6 - Solutions Tutorial Week 6 Chapter 22 9. a. u = e 0.24...

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Solutions – Tutorial Week 6 Chapter 22 9. a. 844 . 0 / 1 ; 185 . 1 5 . 0 24 . 0 = = = = u d e u $45 $53.33 $37.98 $63.19 $45.01 $45.01 $32.06 887 . 0 / 1 ; 127 . 1 25 . 0 24 . 0 = = = = u d e u $45 $50.72 $57.16 $64.41 $35.41 $50.70 $39.92 $44.98 $39.91 $72.60 $57.14 $57.14 $44.97 $44.97 $35.40 $31.41 $35.40 $27.86
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b. 809 . 0 / 1 , 236 . 1 5 . 0 3 . 0 = = = = u d e u $45 $55.62 $36.41 $68.75 $45.00 $45.00 $29.46 $45 $52.29 $60.76 $70.60 $33.36 $52.32 $38.75 $45.02 $38.77 $82.04 $60.79 $60.79 $45.05 $45.05 $33.38 $28.72 $33.38 $24.73 861 . 0 / 1 ; 162 . 1 25 . 0 3 . 0 = = = = u d e u
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12. a. The possible prices of Buffelhead stock and the associated call option values (shown in parentheses) are: Let p equal the probability of a rise in the stock price. Then, if investors are risk-neutral: p (1.00) + (1 – p) × (–0.50) = 0.10 p = 0.4 If the stock price in month 6 is $110, then the option will not be exercised so that it will be worth: [(0.4 × $55) + (0.6 × $0)]/1.10 = $20 Similarly, if the stock price is $440 in month 6, then, if it is exercised, it will be worth ($440 - $165) = $275. If the option is not exercised, it will be worth: [(0.4
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This note was uploaded on 05/12/2010 for the course COMMERCE finc at University of Sydney.

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wk6 - Solutions Tutorial Week 6 Chapter 22 9. a. u = e 0.24...

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