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Consider the following binomial tree. The numbers in squares are stock prices. The numbers in...

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Finance

Consider the following binomial tree. The numbers in squares are stock prices. The numbers in circles will be option prices (# numbers are the exercise numbers to answer your calculation). Today, the stock is at 100 and can go up and down over the next week, and then again up and down from there. we are pricing a call struck at 98.

image

#25 What answer corresponds with the field labeled #25 above?
#26

What answer corresponds with the field labeled #26 above?

#27 image

#28 Interpret the delta. If you sell a call option on 100 shares, the delta hedge will require you to buy shares of stock (how many?). At the same time, the delta hedge will require you to borrow $ (Bear in mind that you buy the delta x 100 of shares and you collect a premium on one hundred options.)

Answers are

#25 1
#26 7
#27 0.55
#28 4,850

Needing to understand how to get to those answers.

#21 120 110 #24 100 #26 100 #22 90 #25 80 #23 Compute the probability of the up- step: 9 = S - Sa Su - Sa Use the computed q to sweep back through the tree to fill the call values in circles. For each node use the formula: C = q Cu + (1-9) Cd. Ignore interest. Today, the delta (hedge ratio) is A= Cu-Ca Su - Sa (4 decimals)

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