Homework: Options and Future
Suppose some stock currently selling for $80 will either increase in value over the next year to $100, or decrease in value to $64. The risk free rate over the period is 10% given annual compounding. [Let r denote the continuously compounded rate per year. Thus er×1 = 1.1.] A European call option on the stock with an exercise price of $85 matures in one period (1 year). If you want to price the option with a two step binomial tree.
• What are u and d?
• What are the payoffs from the call in each state of the world?
• What is the European call price at time 0?
• What are the pseudoprobabilities of the up and down movements in the stock price?
• What is the European put price pseudo probabilities time 0?
• What is the American put price at time 0?
Format your homework according to the give formatting requirements:
• The answer must be using Times New Roman font (size 12), double spaced, typed, with one-inch margins on all sides.
• The response also includes a cover page containing the student's name, the title of the homework, the course title, and the date. The cover page is not included in the required page length.
• Also include a reference page. The references and Citations should follow APA format. The reference page is not included in the required page length.