Log in
HomeClass Notes1,200,000CA670,000

FIN 501 Lecture Notes - Lecture 15: Cope

36 views2 pages
crimsonalpaca842
20 Nov 2014
School
Ryerson University
Department
Finance
Course
FIN 501
Professor
Lianzeng(edward) Yuan

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

If you know the price of similar put, you can use put-call parity to price call option before it expires. 15. 2 1 period binomial option pricing model (bopm) o o o. The fractional share amount needed to hedge 1 call. # of calls to hedge 1 share = C value of call in 1 period u up factor d r down factor risk free rate. Allows to calculate price of call option before maturity (and, no put price is needed) Calculates price of european options on non-dividend paying stocks. S current price of the underlying stock. K strike price specified in option k. R risk-free interest rate over life of option. T time remaining until option expires s price volatility of underlying stock. ; only 1 that is not directly observable. Price of call option on 1 share of cs o. Price of put option on 1 share of cs. Verify : c p = s ke rt.

Get access

Grade+
$40 USD/m
Billed monthly
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
10 Verified Answers
Class+
$30 USD/m
Billed monthly
Class+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
7 Verified Answers

Related Documents

FIN 501 Chapter Notes - Chapter 15: Option Style, Call Option, Strike Price
viridianfish136
FIN 380 Chapter 5: FIN380 CH5
sapphiregnat826
ADMS 3530
Final Exam
Study Guide
ADMS 3530 Study Guide - Quiz Guide: Spot Contract, United States Treasury Security, Systematic Risk
mag0sea

Related Questions

Question 3

Consider a stock currently worth $80 (S = 80) that can go up or down by 25 percent per period. The exercise price is $80 (X = $80) and the risk-free rate is 5 percent (r = .05). The option will expire at the next period (t = 1). You try to find a theoretically fair value of the call using a one-period binomial option pricing model. Answer the following questions. (Hint: See Ch 16 Teaching Notes and Excel Spreadsheet)

Compute the u and d in the binomial option pricing model such that the stock prices at the next period are Su and Sd.

What are two possible stock prices at the next period?

What are the intrinsic values at expiration of a European call option if the stock goes up and down?

Compute two values at expiration of a European call option (Cu and Cd)?

Compute the binomial probability (p)?

Find the theoretical fair value of the call option today using the one-period binomial pricing model.

Compute the riskless hedge ratio (h).

In order to construct a riskless hedge position by buying stocks and selling 1,000 calls using the riskless hedge ratio (h). How many stocks should you buy at what price? At what price should you sell the calls?

Compute the initial value of the riskless hedge position (V0).

Compute the market values of the riskless hedge position at the next period if the stock goes up (Vu) and goes down (Vd).

Find the rate of return on the riskless hedge position (R).

Consider a stock currently worth $80 (S = 80) that can go up or down by 25 percent per period. The exercise price is $80 (X = $80) and the risk-free rate is 5 percent (r = .05). The option will expire at the end of the third period (t = 3). You try to find a theoretically fair value of the put option using a three-period binomial option pricing model. Answer the following questions.

t = 0

t = 1

t = 2

Suu = (c)

Su = (a)

S = $80

Sud = (d)

Sd = (b)

Sdd = (e)

Puu = (f)

Pu = (i)

P = (k)

Pud = (g)

Pd = (j)

Pdd = (h)

a) What are three possible stock prices at time t = 2 (c, d, and e)?

b) Compute three values at time t = 2 of European put options. (Puu, Pud, and Pdd)

c) Compute two values at time t = 1 of a European put options (Pu and Pd).

d) Find the theoretical fair value of the put option today (P).

e) Compute the riskless hedge ratio (h).

f) Construct a riskless hedge position with stocks and 1,000 put options at the theoretically fair value using the riskless hedge ratio (h).

Stock of Apple is currently selling at $143. Suppose in the next six months it can increase by 10% or decrease by 5%. The risk-free interest rate is 1% per six month period. Use the one period binomial option pricing model to value a European call option with strike price of $140 and time to maturity of six months.