ExERcise IV.A.6. Calculate the price of a European Put option from the tree limit by using the appropriate payoff function in the integration formula (IV.4.9).
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- When you keep all parameters unchanged but increase K, will the cost of a European putoption increase or decrease?find a formula for the price of European call option. if R=0 and S=(0)=X=1. Compute the price for U=0.01 and D=-0.19a. Discuss viability of both projects in today’s global business context and allocate and justify discount rate for both projects
- Please define the factors affecting the duration of planning period of the economic institute - Please define the indifference curve (exchange) risk - return with drawing figure - Please explain two characteristics of the maximum of minimum profits criterion (Maximin method)One must know the discount rate of an investment project to compute its: a. NPV and PI. b. NPV and IRR. c. PI NPV IRR and Payback Period. 4. Payback period and IRR.Consider the following payoff table that represents the profits earned for each alternative (A, B, and C) under the states of nature S1, S2, and S3. Using the Laplace criterion, what would be the highest expected payoff? S1 S2 S3 A $100 145 120 B $75 125 110 C $95 85 60
- Using the NPV index approach to ranking projects, which projects should the firm accept? A. 1, 6, 5 and 3 B. 1, 2, 3, and 5 C. 2, 3, 4, and 6 D. 1, 3, 4, and 6Consider the following sets of investment projects: (a) Classify each project as either simple or nonsimple.(b) Compute the i* for Project A, using the quadratic equation.(c) Obtain the rate(s) of return for each project by plotting the PW as a function of interest rate.Suppose that in a two-period Arrow-Debreu economy with three states, the state probabilities are T₁ = 0.1, 7₂ = 0.55, 73=0.35 and the state prices are 9₁ = 0.2, 9₂=0.5, 93 = 0.8 for states 1, 2, and 3 respectively. Assume that an asset has the state-contingent dividend given in the following table, and the observed price of the asset is 4.1. State-contingent dividend State 1 State 2 State 3 Asset's dividend 5 3 2 According to information above, which one of the following statements regarding arbitrage opportunities is correct? O A. In this case, arbitrage opportunities do not exist. O B. In this case, arbitrage opportunities exist because the asset is over-priced. O c. In this case, arbitrage opportunities exist because the asset is under-priced. O D. Due to insufficient information, it is inconclusive whether arbitrage opportunities exist or not.
- Mf4. 1. Calculate the Payback period 2. Calculate the Net Present Value (NPV) of both projects 3. Calculate the Internal Rate of Return (IRR) of both projects 4. Critically discuss the merits of each investment appraisal method, then discuss the result of the evaluations you have made of the two projects and advise the company which project should be undertakenConsider a two-period binomial market model for an underlying asset with price process S; at each time t. Branching fromt to t+1 results in St+1 and St+1 = dS; in case of a downward price move. You are asked to input values So = 2, u = 2, d = 1/2, r = 0.1, and 8 = 0 to price a European put option with strike price 3. uSt in case of an upward price move, a. Write down the evolution of the underlying stock and the payoff of the option along the tree. b. Determine the structure of the replicating portfolio at times 0 and 1 in every node. c. Determine the price of the option at time 0. d. Explain how the price computed at point (c) would change if the option were of American type.Answer this question as it is pertaining to two MUTUALLY EXCLUSIVE projects on the following figure. At what discount rate will you be indifferent to these two projects under the NPV rule? Group of answer choices 0% 8% 11% 14%