A stock is priced at 40 and the periodic risk-free rate of interest is 8%. What is the value of a two-period European call option with a strike price of 37 on a share of stock using a binomial model with an up factor of 1.20 and a (risk-neutral) up probability of 6%? A) $9.25. B) $3.57. C) $9.07. – I’ll post the answer shortly… I just want to see what you guys get first.
I am getting 9.12578107
You know what - I got the issue (or I think I did…) Instead of using piu = 0.67275 and pid = 0.32724 TRY USING rounded values piu = 0.67 pid = 0.33 and you will get 9.06544717… C?
9.1233722222 choice C
There’s a typo in the question, probability for up should be 67% Using that, answer is C
Dudes, I just did question 17 for Reading 63 (page 277 in CFA). Apparently, a down move isn’t necessarily equal to the reciprocal of an up move??? Up move is 12%, down move is 15% 1/1.12 = 9.893 which is not equal to 0.85 Take a look.
hmmmm… so I got 3.63, so i’d answer B, but I guess I’m doing something completely wrong??
TheAliMan Wrote: ------------------------------------------------------- > Dudes, I just did question 17 for Reading 63 (page > 277 in CFA). Apparently, a down move isn’t > necessarily equal to the reciprocal of an up > move??? > > Up move is 12%, down move is 15% > > 1/1.12 = 9.893 which is not equal to 0.85 > > Take a look. No, it is not necessarily so. Why would it be? It is often done that way for computational simplicity but the model imposes only the restriction that d < 1+r < u.
i just did it and got 9.124852 (a few rounding liberties taken, but seems like we’re all getting close to same #)
Correct for Choice C. These rounding issues drive me crazy… thanks guys
Going over this again… Can anyone else confirm that there is a typo in the question and the probability of up an up move should be 67%? I know that’s what you get when you use the 1-Rf-D/ (U-D).