Question 1 You have a stock with a current price of $25.00. You are going...
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Question 1
You have a stock with a current price of $25.00. You are going to value a call option with an exercise price of $26.00. The up and down factors are 1.10 and 0.90 respectively. The stock will go through two time periods before it expires. The risk-free rate per time period is 2%. Value this option the following 2 ways:
A) By calculating the necessary hedge ratio(s)
B) By calculating the risk-neutral probability defined as
Question 2
Calculate the implied volatility for 5 different exercise prices for a stock of your choice. The option should expire in June and be relatively actively traded on the Canadian markets. The exercise prices should be relatively at the money (for example, choose the option that is closest to the current stock price, and then choose the two immediately above and below it). Calculate continuously compounded historical volatility over the past 250 trading days for the same stock. Comment on any differences you find in the above-calculated utilities.
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