## (solution) 1.You are an option dealer. Given a binomial model for stock

1.You are an option dealer. Given a binomial model for stock prices, you sell call option where:

s0=50, su=61, sd=41, x=56, r=0.05, t=2

Number N of shares: 1000

a)Calculate the fair market price for the call option

b)Assume that you sell 1000 shares of the option for the fair market price + \$0.12. How many shares of stock should you buy to hedge the sale?

c)What is your profit, independent of the outcome of stock price?

2.Assume that a stock model happens to have the parameters u=1.1, d=0.9, p=0.7, and we know that E(S2)= 27. Find S0 and all possible value for S1 and S2

3.A stock tree has three periods. The stock parameters are S0 = 21, u = 1.1, d = 0.8, and q = 0.7. Find E(S3)

4.Use the stock tree below, with a down and out barrier set \$64, to find the option price at t=0 with X=\$49 and r= 0.05 (picture attached)

Solution details:
STATUS
Answered
QUALITY
Approved
ANSWER RATING

STATUS

Answered

QUALITY

Approved

DATE ANSWERED

Sep 13, 2020

EXPERT

Tutor

ANSWER RATING

### Order New Solution. Quick Turnaround

Click on the button below in order to Order for a New, Original and High-Quality Essay Solutions. New orders are original solutions and precise to your writing instruction requirements. Place a New Order using the button below.

WE GUARANTEE, THAT YOUR PAPER WILL BE WRITTEN FROM SCRATCH AND WITHIN A DEADLINE. 