Problem 1) 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.
Problem 2) Consider a two-period, two-state world. Let the current stock price be $60 and the risk-free rate be 10%. In each period, the stock price can either go up by 15% or down by 20%. A call option expiring at the end of the second period has an exercise price of $50.
- Find the stock price sequence.
- Determine the possible prices of the call at expiration.
- Find the possible prices of the call at the end of the first period.
- What is the current price of the call?
- What is the initial hedge ratio?