5.A stock index is currently trading at 50.00. The annual index standard deviation is 20percent. Paul Tripp, CFA, wants to value two-year index options using the binomialmodel. To correctly value the options, he needs the formulas in Exhibit 1. The annualrisk-free interest rate is 6 percent. Assume no dividends are paid on any of theunderlying securities in the index.Exhibit 1.e-DU = e = 1.2214d==-π₂where e 1.06184U-DWhere:U = up movement factorD = down movement factorT = probability of an upward price movement Exhibit 2.Discount Factors5.00%6.00%7.00%Period 10.951230.941760.93239Period 20.904840.886920.86936Period 3 0.860710.835270.81058A:Construct a two-period binomial lattice for the stock index.B:Calculate the value of a European index call option with an exercise price of60.00.C:Calculate the value of a European index put option with an exercise price of60.00.

The question is based on the concept of the binomial option pricing model, the model explains the…

Discount Factors 5.00% 6.00% 7.00% Period 1 0.95123 0.94176 0.93239 Period 2 0.90484 0.88692 0.86936 Period 3 0.86071 0.83527 0.81058 A: Construct a two-period binomial lattice for the stock index. B: Calculate the value of a European index call option with an exercise price of 60.00. C: the value of a European index put option with an exercise price of Calculate 60.00.

Discount Factors 5.00% 6.00% 7.00% Period 1 0.95123 0.94176 0.93239 Period 2 0.90484 0.88692 0.86936 Period 3 0.86071 0.83527 0.81058 A: Construct a two-period binomial lattice for the stock index. B: Calculate the value of a European index call option with an exercise price of 60.00. C: the value of a European index put option with an exercise price of Calculate 60.00.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A stock index is currently trading at 50.00. The annual index standard deviation is 20 percent. Paul Tripp, CFA, wants to value two-year index options using the binomial model. To correctly value the options, he needs the formulas in Exhibit 1. The annual risk-free interest rate is 6 percent. Assume no dividends are paid on any of the underlying securities in the index. Exhibit 1 formulas U = estdev sqrt(delta t) D = 1/U last formula attached as a screenshot Q.Please explain step by step, please also explain how to calculate the (delta t)
A stock is currently priced at $49 and will move up by a factor of 1.48 or down by a factor of 88 each period over each of the next two periods. The risk-free rate of interest is 3 percent. What is the value of a put option with a strike price of $697 (Do not round intermediate calculations. Round your answer to 2 decimal places.) Answer is complete but not entirely correct. Value of a put option $ 29.27
The level of the Syldavian market index is 21,600 at the start of the year and 26,100 at the end. The dividend yield on the index is 4.3%. a. What is the return on the index over the year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Retur b. If the interest rate is 5%, what is the risk premium over the year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Risk Premium % Real Return % c. If the inflation rate is 7%, what is the real return on the index over the year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) %
A stock is currently priced at $35 and will move up by a factor of 1.18 or down by a factor of .85 each period over each of the next two periods. The risk-free rate of interest is 3 percent. What is the value of a put option with a strike price of $40? (Do not round Intermediate calculations. Round your answer to 2 decimal places.) please show in excel! thank you
Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. A B C Ро 90 50 100 Rate of return Divisor во 100 200 200 P1 95 45 110 Required: a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t = 1). (Do not round intermediate calculations. Round your answer to 2 decimal places.) Rate of return % 01 100 200 200 P2 95 45 55 b. What will be the divisor for the price-weighted index in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.) 92 100 200 400 % c. Calculate the rate of return of the price-weighted index for the second period (t = 1 to t = 2).
Consider an American put option (K=$100) expiring in one year on a stock trading for $84. The return volatility on the stock is 27.3% and the riskless rate is 5%. Find the price of the option using a Binomial Model with two steps. (Respond with two decimal places, such as "-12.34") 26.59 Correct Answer: 18.28
Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period (t=2). Po A 100 B 60 C 120 Qo 100 200 200 P₁ 105 55 130 Rate of return b. An equally weighted index. Rate of return Q₁ 100 200 200 % P2 % 105 55 65 Calculate the first-period rates of return on the following indexes of the three stocks (t = O to t = 1): (Do not round intermediate calculations. Round your answers to 2 decimal places.) a. A market value-weighted index. Q2 100 200 400
Consider the three stocks in the following table. Pe represents price at time t, and Qe represents shares outstanding at time t Stock C splits two for one in the last period. Stock A B С PO 80 85 35 20 275 650 950 a. Rate of return b. New divisor c. Rate of return P1 85 80 50 01 275 650 950 % P₂ Required: a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t=0 to t= 1). Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. Calculate the new divisor for the price-weighted index in year 2. Note: Do not round intermediate calculations. Round your answer to 2 decimal places. c. Calculate the rate of return for the second period (t=1 to t=2). Note: Round your answer to 2 decimal places. % 85 80 25 02 275 650 1,900
A stock is currently priced at $42 and will move up by a factor of 1.24 or down by a factor of .93 each period over each of the next two periods. The risk-free rate of interest is 3 percent. What is the value of a put option with a strike price of $51? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
2. The following table shows the constituent stocks of a hypothetical index. Stock B splits two-for-one during the period. Stock A B C Beginning of Period Price ($) Shares 30 75 36 2,000 500 1,200 End of Period Price ($) 26 40 32 Shares 2,000 1,000 1,200 a. Calculate the returns on both the price-weighted index and the market value- weighted index of three stocks over the period. b. If you just buy 5,000 shares of stock C for $36, hold for 1 year, collect $8 dividend and sell it at $32. Calculate your total return.
Use the Black Scholes formulas and Excel (to avoid rounding errors in the final answers) to answer this question. Consider an option on a non-dividend-paying stock when the stock price is $44, the exercise price is $40, the risk-free interest rate is 6%, the volatility is 28% per annum, and the time to maturity is 4 months. (a) Find N(d1), enter answer to 3 decimal places. (b) Find N(d2),, enter answer to 3 decimal places. (c) What is the price of the option if it is a European call? Round answer to 3 decimal places. (d) What is the price of the option if it is a European put? Round answer to 3 decimal places.
The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume that the risk-free rate is zero. An investor sells put options with a strike price of $32. What is the risk-neutral probability of the underlying hitting $36 and what is the value of each put option? Question 5Answer a. 0.4 and $3.6 b. 0.6 and $3.6 c. 0.6 and $1.6 d. 0.4 and $1.6

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