Please expalin steps in detail on how to get the answer Thank you Let S = $55, K
ID: 1175080 • Letter: P
Question
Please expalin steps in detail on how to get the answer Thank you
Let S = $55, K = $60, r = 5% (continuously compounded), T = 1, and d = 0. Let u = 1.1, d = 0.9, and n = 1. What are D and B for a European put?
D = –0.7140; B = 44.3863
D = –0.8915; B = 59.7127
D = –0.6796; B = 42.9031
D = –0.7140; B = 44.3863
D = –0.9545; B = 54.9335
D = –1.2724; B = 71.1938
Let S = $55, K = $60, r = 5% (continuously compounded), T = 1, and d = 0. Let u = 1.1, d = 0.9, and n = 1. What are D and B for a European put?
Selected Answer: c.D = –0.7140; B = 44.3863
Answers: a.D = –0.8915; B = 59.7127
b.D = –0.6796; B = 42.9031
c.D = –0.7140; B = 44.3863
d.D = –0.9545; B = 54.9335
e.D = –1.2724; B = 71.1938
Explanation / Answer
Solution:
Option 'd' is correct.
Solution:
55 x 1.1 = 60.5
S
55 x 0.90 = 49.5
Stock
Pu = Max (60-60.5, 0) = 0
P
Pd = Max (60-49.5, 0) = 10.5
D = [(Pd – Pu)]/[(u – d)S]
D = [(10.5 – 0)]/[1.1 – 0.90)(55)]
D = -0.9545
B = (uPd – d Pu)/[R(u-d)]
B= [(1.1*10.5 – 0.90*0)]/(1.1-0.90) (1 + 0.05)
B = 11.55/0.21
B = 54.9335