Exam 10: Binomial Option Pricing

Draw the binomial tree listing only the stock prices at each node. Assume the following data on a 6-month call option, using 3-month intervals as the time period. K = $70, S = $68.50, r = 6.0%, σ = 0.32

Compute Δ for the following call option. The stock is selling for $23.50. The strike price is $25. The possible stock prices at the end of 6 months are $27.25 and $21.75.

A stock is selling for $18.50. The strike price on a call, maturing in 6 months, is $20. The possible stock prices at the end of 6 months are $22.50 and $15.00. Interest rates are 6.0%. How much money would you borrow to create an arbitrage on a call trading for $2.00?

A stock is selling for $32.70. The strike price on a call, maturing in 6 months, is $35. The possible stock prices at the end of 6 months are $39.50 and $28.40. If interest rates are 6.0%, what is the option price?

A call option has an exercise price of $30. The stock price at a point on the binomial tree is $36.24. The calculated present value of the option at that same point is $5.86. What figure should be used to calculate option prices at points moving toward the final price?