CHAPTER 21

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Unformatted text preview: value of the European put is: If the stock price in month 6 is C$90.0, then the value of the put is: Since this is a European put, it can not be exercised at month 6. The value of the put at month 0 is: b. Since the American put can be exercised at month 6, then, if the stock price is C$90.0, the put is worth (102 – 90) = $12 if exercised, compared to $7.15 if not exercised. Thus, the value of the American put in month 0 is: 10. a. P = 200 EX = 180 s = 0.223 t = 1.0 rf = 0.21 N(d1) = N(1.4388) = 0.9249 N(d2) = N(1.2158) = 0.8880 Call value = [N(d1) ´ P] – [N(d2) ´ PV(EX)] = [0.9249 ´ 200] – [0.8880 ´ (180/1.21)] = $52.88 b. Let p equal the probability that the stock price will rise. Then, for a risk­neutral investor: (p ´ 0.25) + (1 ­ p)´(­0.20) = 0.21 p = 0.91 In one year, the stock price will be either $250 or $160, and the option values will be $70 or $0, respectively. Therefore, the value of the option is: c. Let p equal the probability that the stock price will rise. Then, for a risk­neutral investor: (p ´ 0.171) + (1 ­ p)´(­0.146) = 0.10 p = 0.776 The following tree gives stock prices, with option values in parentheses:...
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This note was uploaded on 04/26/2013 for the course MATH 289Q taught by Professor Jamesbridgeman during the Fall '04 term at UConn.

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