Binomial

AMITAG1990
Finance Junkie
Posts: 89
Joined: Sat Sep 22, 2012 12:35 pm

Binomial

Postby AMITAG1990 » Fri Nov 09, 2012 5:04 pm

An American call option with a life of 1 year has a strike price of $43 and the underlying stock is trading at $44. The volatility of the stock is 8%, the risk free interest rate is 5% and one time steps is 6-months long.
Choose one answer.
a. $2.63 Correct
b. $3.00 Incorrect
c. $3.20 Incorrect
d. $3.50 Incorrect
The correct answer is $2.63
u = e0.08*(0.5)0.5 = 1.058; hence d = 0.945; p = 0.71; f = e-2*0.05*0.5[0.71(0.71*4.66 + 0.29*1) +0.29(0.71*1)] = $2.63

Pleae verify wether his solution is true.. Actuallu i am getting 6.25 instead of 4.66...

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content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Binomial

Postby content.pristine » Mon Nov 12, 2012 5:47 pm

You are right Amit. :D
That value should be 6.27.
That would make the option cost $3.39.
What is the source of this question?
8-)

AMITAG1990
Finance Junkie
Posts: 89
Joined: Sat Sep 22, 2012 12:35 pm

Re: Binomial

Postby AMITAG1990 » Tue Nov 13, 2012 5:10 pm

Source is pristine mock test.


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