# tutorial5 - stock. The payments made by the stock in each...

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TUTORIAL 5– WEEK 6 ECON3107/ECON5106 – Economics of Finance 1. The time-state prices of the stock are shown in the tree diagram below. The one-period interest rate is 10 percent. i). Calculate the arbitrage-free price in period 0 of a European Call (buy) option on the stock with an exercise price of 15 in period 3. ii). Calculate the arbitrage-free price in period 0 of an American Put (sell) option on the stock. The option expires in Period 3. It has an exercise price of 15 . 2. Consider a three period binomial time-state model in which there are two securities, a bond and a
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Unformatted text preview: stock. The payments made by the stock in each state are shown in the tree below. The bond pays 10 percent interest each period. Figure 1: Lattice for the Stock (i) Calculate the price in period 0 of an American call (buy) option that expires at the end of period 2 with an exercise price of 1.60. Explain how you arrived at your answer. (ii) Calculate the price in period 0 of an American put (sell) option that expires at the end of period 2 with an exercise price of 1.60. Explain how you arrived at your answer. 1...
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