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A tree is constructed to value an option on an index which is currently worth 100 and has a volatility of 25%. The index provides a dividend yield of 2%. Another tree is constructed to value an option on a non-dividend-paying stock which is currently worth 100 and has a volatility of 25%. a) Calculate the parameters u and p for both the index and the stock. Are the paremeters u and p same for both index and the stock? Give reasons for yes or no. b) Calculate the option price on the index by using the risk neutral probability approach. Show the labelled tree.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92379790

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