Use the following information to answer questions 7-16 Consider the following bi
ID: 2766087 • Letter: U
Question
Use the following information to answer questions 7-16
Consider the following binomial tree. The numbers in squares are stock prices. The numbers in circles will be option prices (# numbers are the exercise numbers to answer your calculation).
Use the computed q to sweep back through the tree to fill the call values in circles. For each node use the formula: C = q Cu + (1-q) Cd. Ignore interest.
Q7: Compute the probability of the up-step: q =
Q8: #8 Call Value =
Q9: #9 Call Value =
Q10: #10 Call Value =
Q11: #11 Call Value =
Q12: #12 Call Value =
Q13: #13 Today’s Call Value=
Q15: Exercise #15. Today’s call premium is: $______
Q16:Exercise #16. Interpret the delta. If you sell a call option on one hundred shares, the delta hedge will require you to buy _______________ shares of stock (how many?).
Please shows the works, thank you
Explanation / Answer
I can answer only four question as per the chegg guidelines
Q7 preobaility of uptick= (S0- Sd)/( Su -Sd)
S0=110
Sd=100
Su=120
P= (110-100)/(120-100) = 10/20=0.5
Hence downwards tick q = 1-0.5 = 0.5
Q8 For 120 call value = 120-90 =30
Q9For 100 call value would be =100-90 =10
Q10 For 80 call value =0 since value below stock price
Q11 Call value at node #8 * 0.5 + Call Value at node # 9 * 0.5
=0.5*30+ 0.5*10 == 25
Q12Call value at node #9 * 0.5 + Call Value at node # 10 *
= 10*.5 =5
Q13 Todays call value =0.5* 5 +0.5*25 = 15