Assignment: Curtis- Binomial Option Pricing Model
Tom Curtis has prepared a hypothetical problem for you and your group to solve. He wants you to utilize the two-period binomial option pricing model to solve certain problems. If your team passes this test, you might soon be developing derivative strategies for Ricardo International to use.
Conduct research on two different models used to price call options. Detail each model in a Word document and focus on comparing and contrasting the models. (2 Pages Word Document)
Solve the following (2 page word document):
Consider a two-period, two-state world. Let the current stock price be $35 and the risk-free rate is 5%. In each period, the stock price can either go up by 10% or down by 10%. A call option expiring at the end of the second period has an exercise price of $30.
1. Find the stock price sequence.
2. Determine the possible prices of the call at expiration.
3. Find the possible prices of the call at the end of the first period.
4. What is the current price of the call?
5. What is the initial hedge ratio?
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.