Finance > QUESTIONS & ANSWERS > Boston University FINANCE RISK MANAGEMENT 5 Assignment Answers (All)

Boston University FINANCE RISK MANAGEMENT 5 Assignment Answers

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5o Assignment 1. What is the value of a European call option with an exercise price of $40 and a maturity date six months from now if the stock price is $28, the instantaneous variance of the stock ... price is 0.5 and the risk-free rate is 6%? Use both a) a two-steps binomial tree, b) the Black-Scholes pricing formula We have: So=$28, K=$40, r=0.06, σ2=0.5, Τ=0.5, and Τ/2=0.25 (for each step of the binomial tree) a) The risk-neutral probability is u d e d p r t     =0.433, while ue t =1.424 and de  t =0.702 The binomial tree, for a call option is the following D B E A C F We know that: fu = e-rT (p fuu + (1-p) fud) fd = e-rT (p fud + (1-p) fdd) f = e-rT (p fu + (1-p) fd) Substituting, we have for the price of the call option, c=3.06. From put-call parity, the price of the put option is p=13.87 b) We know that cS0N(d1) Xe rT N(d2) and [Show More]

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