Suppose the price of a stock is 100 today and it evolves, Ask an Expert

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Suppose the price of a stock is $100 today and it evolves according to u= 1.1 and d= 0.8 in 6-month periods.

A. Draw and label a tree that shows the price of the stock today, after 6-months and after 1 year.

B. A put option on the stock has exercise price $90 and expires in one year. Denote the price of this put option today as P put and then Pu,Pd, and, Puu, Pud, Pdu, Pdd the payoffs after 6 months and 1 year respectively. Calculate Puu, Pud, Pdu, Pdd.

C. Find the price of such a put option by using the replication method of a call option. Assume the 6-month risk-free interest rate is 2 percent

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92360254

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