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Question one Consider a two-period binomial model in which a stock currently trades at a price of...

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Finance

Question one

Consider a two-period binomial model in which a stockcurrently trades at a price of K65. The stock price can go up 20percent or down 17 percent each period. The risk-free rate is 5percent.
(i) Calculate the price of a put option expiring in two periodswith exercise price of K60.
(ii) Calculate the price of a call option expiring in two periodswith an exercise price of K70.

(iii)‘Risk management is not about elimination ofrisk’, Discuss.

Answer & Explanation Solved by verified expert
3.9 Ratings (412 Votes)
As time has not given in question assumed 1 year with 2steps Binomial model asfor PUT option with strike price 60At each nodeUppervalue Underlying Asset PriceLowervalue Option PriceValuesin red    See Answer
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