1) For the two-period (each period is 6 months) binomial option pricing model, So=75, and the standard deviation is 5

Finance Dec 25, 2020

1) For the two-period (each period is 6 months) binomial option pricing model, So=75, and the standard deviation is 5.56%. The risk-free interest rate is 3%. Calculate the probability (p) and the stock price moving up in one-time step?

a. .7777

b. .6666

c. .8750

d. .5555

2. For the previous problem, what is the value of a call option with strike price $75, and time-to-maturity = 1/2 year

a. $1.89

b. $2.55

c. None of the above

d. $2.83

Expert Solution

Given: standard deviation=5.56%

t=1/2

rf=3%

S=75

X=75

1.
=(exp(3%*1/2)-exp(-5.56%*sqrt(1/2)))/(exp(5.56%*sqrt(1/2))-exp(-5.56%*sqrt(1/2)))
=0.682327121

2.
=0.6666*MAX(75*exp(5.56%*sqrt(1/2))-75,0)*exp(-3%*1/2)
=1.974864

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