1)Binomial trees 1

1)Binomial trees 1. Suppose that Contact Energy currently trades at $2.04. The interest rate is 1% (with continuous compounding), and Contact Energy shares have a volatility of 16%. Set up a two step binomial tree for the stock, with each step representing three months. (a) What is the value of an American call option with strike price $2.15, maturing in six months time? (b) What is the value of a American put option with strike price $2.15 maturing in six months time? (c) Verify that the two prices satisfy the put-call relationship for American options.

2)On January 20, Sullivan Inc., sold 8 million shares of stock in an SEO. The market price of Sullivan at the time was $41.50 per share. Of the 8 million shares sold, 5 million shares were primary shares being sold by the company, and the remaining 3 million shares were being sold by the venture capital investors. Assume the underwriter charges 5.4% of the gross proceeds as an underwriting fee a. How much money did Sullivan raise? b. How much money did the venture capitalists receive? c. If the stock price dropped 2.9% on the announcement of the SEO and the new shares were sold at that price, how much money would Sullivan receive? a. How much money did Sullivan raise? After underwriting fees, Sullivan raised $ million (Round to two decimal places.)

3)Suppose a? five-year, $ 1,000 bond with annual coupons has a price of $899.75 and a yield to maturity of 5.7%. What is the bonds coupon rate?