Consider a stock in two periods (two years). The stock price goes up by 30% or down by 10% in each period. Current stock price is $100. There is a European put option on the stock with exercise price $110 and time to maturity of two years. The interest rate in each period is 6%. In the template, Date 0 denotes today, Date 1 denotes the end of year 1 and Date 2 denotes the end of year 2. Use the two-period binomial tree model and discrete discounting to find the put option price on Date 0.
Consider a stock in two periods (two years). The stock price goes up by 30% or down by 10% in each period. Current stock price is $100. There is a European put option on the stock with exercise price $110 and time to maturity of two years. The interest rate in each period is 6%. In the template, Date 0 denotes today, Date 1 denotes the end of year 1 and Date 2 denotes the end of year 2. Use the two-period binomial tree model and discrete discounting to find the put option price on Date 0.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Consider a stock in two periods (two years). The stock price goes up by 30% or down by 10%
in each period. Current stock price is $100. There is a European put option on the stock with
exercise price $110 and time to maturity of two years. The interest rate in each period is 6%. In
the template, Date 0 denotes today, Date 1 denotes the end of year 1 and Date 2 denotes the end
of year 2. Use the two-period binomial tree model and discrete discounting to find the put option
price on Date 0.
Transcribed Image Text:1||
2
3
5 Initial stock orice. S O
6 Interest rate.r
7 Exercise price. K
8 Time to maturity. I(years)
9
10 Stock price
11
12
13
14
15
16
17
18 Put option price
19
20
21
22
24
25
26
27
35
36
37
28 Finding ???-1 for the put
29
30
31
32
45
46 Put price ???-1
47
51
52
54
55
57
58
59
60
38
39
40 The put replicating portfolio
41 Solve equations for min
42 Coefficients
43
Date 0
Date 0
48
49 Finding 777-2 for the put
72
Up
Down
74
75
76
77
78
79
???:0
62 Solve equations for min
63 Coefficients
65
67 Put price ??-2
91
92
93
96
97
99
Stock price
Put option price
70 Finding ???-0 for the put
71
87
88 Put price ???.0
The put replicating portfolio
Stock price
81
82 The put replicating portfolio
83 Solve equations for min
34 Coefficients
85
222.1.
Put option price
222:2
m₂
Stock price
Put option price
222:0
Date 1
222-1
Constant
222-2
Date 1
30%
-10%
Constant
Constant
THREE-DATE BINOMIAL OPTION PRICING
100
6%
110
Date 2
Date 2
m
m
m
Band price
Bond price
Band price
Band price
Date 0
Date 1
Date 2
!
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 1 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education