Problema stock price is currently 50 over each of the next, Ask an Expert

Finance

Problem:

A stock price is currently $50. Over each of the next two 3-month periods it is expected to go up by 7% or down by 5%. The risk-free interest rate is 5% per annum with continuous compounding. The strike price is $52 for a European call.

Required:

Question 1: Calculate u, d, and p for a two-step tree.

Question 2: Value the option using a two-step tree formula.

Question 3: Re-calculate the value of this call assuming the stock has a dividend yield of 3% per annum.

Note: Explain all steps comprehensively.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M91148450

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