Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. the following is a binomial option pricing model q

The following is a Binomial Option Pricing Model question. There will be 7 questions asked...

90.2K

Verified Solution

Question

Finance

The following is a Binomial Option Pricing Model question. There will be 7 questions asked about it. Since the order of questions chosen is random, I suggest you solve the following all at once and choose your answer to each part as it comes up.

You will be asked the following questions:

1. What are the values of the calls at maturity, t=2?

2. What are the values of the calls at t =1?

3. What is the initial (t = 0) fair market price of the call?

4. What is the initial (t = 0) hedge ratio?

5. What are the hedge ratios at t = 1?

6. If one call was written initially, what is the value of the hedged portfolio one period later (t = 1)?

7. If the stock moves down in period 1 how would you adjust your t = 0 hedge by trading only stock?

We have a 2-state, 2-period world (i.e. t = 0, 1, 2). The current stock price is 100 and the risk-free rate each period is 5%. Each period the stock can either go up by 10% or down by 10%. A European call option on this stock with an exercise price of 90 expires at the end of the second period.

What is the initial (t = 0) hedge ratio?

(closest answer)

0.32

1.00

0.65

0.22

0.89

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students