Mock Test 4th Nov

naresh.thkr
Good Student
Posts: 25
Joined: Sat Aug 11, 2012 7:02 pm

Mock Test 4th Nov

Postby naresh.thkr » Tue Nov 06, 2012 11:26 am

An investor is long in a 2 year American Put option of Riverstone Ships. The up move factor is 1.23. The risk free rate is 3.5%. The current price for Riverstone Ships is $12. Which of the following is true based on one period binomial model, if the strike price of the option is $18.
I.The probability of up move is 0.47 and probability of down move is 0.53
II.At Year 1 up move, The investor should not do early exercise of the option, since option is worth more unexercised
III.At Year 1 down move, The investor should do early exercise of the option as option is worth less unexercised
IV.The value of the option today is $5.38
Choose one answer.
a. I,II and III
b. I,III and IV
c. II,III and IV
d. I and III only
Answer should be C instead of B.

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naresh.thkr
Good Student
Posts: 25
Joined: Sat Aug 11, 2012 7:02 pm

Re: Mock Test 4th Nov

Postby naresh.thkr » Tue Nov 06, 2012 11:29 am

In this case, answer should be III and IV which is not there in option.

balajismz
Finance Junkie
Posts: 63
Joined: Mon Nov 05, 2012 9:13 am

Re: Mock Test 4th Nov

Postby balajismz » Tue Nov 06, 2012 11:31 am

you are right, the solution given is incorrect

Balaji


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