1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
vazorg [7]
3 years ago
10

A stock price is currently $40. Over each of the next two three-month periods it is expected to go up by 10% or down by 10% (mea

ning, precisely, if the stock price at the start of a period is $40, it will go to $40*1.1=$44 or to $40*0.9=$36 at the end of the period and if the stock price at the start of a period is $44, it will go to $44*1.1=$48.44 or to $44*0.9=$39.6 at the end of the period). The risk-free interest rate is 12% per annum with continuous compounding. a. What is the value of a six-month European put option with a strike price of $42? b. What is the value of a six-month American put option with a strike price of $42? c. What is the value of a six-month American put option with a strike price of $45? What do you conclude about whether or not it is optimal to exercise this American option immediately (Hint: What would be the value of this American option if it were to be exercised immediately)
Business
1 answer:
ad-work [718]3 years ago
4 0

Answer:

Explanation:

The Risk neutral probability is given by

e rt − D / U-D

U=1.1

D=0.9

R=0.12

T=3/12

π u = e∧ 0.12 ∗ 3 / 12 − 0.9 /1.1 − 0.9

 =0.652

π d = 1− 0.652 = 0.348

The values of american and european options at each node is given in the following table.

                                    0.652  

                                                                                                    0  

                                                                0.81   48.4  

                                                                0.652    

                                                                0.81    

American option value     2.54         44    

probability                    0.652/0.3478'  

Option value                     2.12        2.4  

Futures price                        40           6      39.6  

                                                               0.3478    

                                                               4.76    

                                                                  36    

                                                                                           0.3478  

                                                                                           9.6  

                                                                                          32.4  

Time period                         0      3           6

the value at up node at 3 months is given by = ( 0.652∗ 0 ) + ( 0.3478 ∗ 2.4 )/e ∧0.12 ∗ 3 / 12 = 0.81

Hence, value of european put option =$2.12

Value of American put option = 2.54

You might be interested in
Will today's second generation of immigrants move up the occupational ladder?
Ket [755]
No not if Donald Trump becomes president he is sending all imagrants back and he wants all white schools so
7 0
3 years ago
Beswick company your team is allocated a project involving a major client, the beswick company. although the organization has ma
lianna [129]

Answer: A. low degree of substitutability.

Explanation:

Substitutability refers to the availability of alternative options to the variable in question. If something is said to be highly substitutable or to have a high degree of substitutability, then that means that it is easily replaceable because it has alternatives. The reverse holds true.

Therefore, Jamie can be said to have a low degree of substitutability because the client wants to deal with only him and if he is removed or unavailable, the company would not be able to deal with the client.

6 0
3 years ago
is the view of the global economic system as divided between certian industrialized nations that control wealth and developing c
Natali5045456 [20]

Answer:

I do not understand your question explain further

8 0
3 years ago
Which of the following condition will both consumers and sellers benefit?
victus00 [196]
Answer: Option C) When supply equals demand.

The most common supply curve decreases with price. The most common demand curve increases with price. The point at which supply and demand curves intercept each other is the equilibrium point. At that point (equilibrium), there are consumers who are paying less than what they are willing to pay (generating a consumer surplus) and there are producers who are selling at a price that is higher than what they are willing to receive (generating a producer surplus), then both consumer and producers benefit.
5 0
3 years ago
Baa-rated bonds currently yield 6%, while Aa-rated bonds yield 4%. Suppose that due to an increase in the expected inflation rat
ollegr [7]

Answer: The new confidence index is 0.7143

Explanation: Consumer confidence index which is known as the confidence index is an index used for estimating the economy of the U.S, it is published by the conference board which shows the decree of excitement in peoples's activities on their savings and spendings.

To calculate the new confidence index;

STEP1: Add the bond increase to the current bond;

6% + 1% = 7%

4% + 1% = 5%

STEP 2: FIND THE NEW CONFIDENCE INDEX

5% ÷ 7% = 0.7143

The old confidence index can also be calculated as

4% ÷ 6% = 0.6667

8 0
3 years ago
Other questions:
  • Marcus and tony work for lombardo's pipe and concrete. mr. lombardo is preparing an estimate for a customer. he knows that maruc
    12·1 answer
  • The method of least squares was used to develop a cost equation to predict the cost of monthly equipment maintenance. The follow
    9·1 answer
  • Roca, Inc., manufactures and sells two products: Product M6 and Product X7. The company has an activity-based costing system wit
    5·1 answer
  • Body Sync Inc. is a chain of gyms. It offers a fitness package that allows its members to use the gym facilities for 12 months b
    13·1 answer
  • All of the following are challenges of outsourcing, except:
    14·1 answer
  • The work of your group would be better done in teams if the members of the team are ________.A) independentB) autonomousC) indiv
    6·1 answer
  • Fetzer Company declared a $0.35 per share cash dividend. The company has 200,000 shares authorized, 190,000 shares issued, and 8
    10·1 answer
  • Describe the slope of the supply curve. How does the slope reflect the law of supply?
    12·2 answers
  • One joint of marijuana impairs a person more than having a blood alcohol content of _____ %.
    8·1 answer
  • Once the information is complete and conclusions are made, then management can make more confident business decisions. This is p
    12·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!