Exam 12: Introduction to Binomial Trees

The current price of a non-dividend-paying stock is $30. Over the next six months, it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. i) What long position in the stock is necessary to hedge a short call option when the strike price is $32? Give the number of shares purchased as a percentage of the number of options that have been sold. _ _ _ _ _ _ ii) What is the value of the call option? _ _ _ _ _ _ iii) What long position in the stock is necessary to hedge a long put option when the strike price is $32? Give the number of shares purchased as a percentage of the number of options purchased. _ _ _ _ _ _ iv) What is the value of the put option? _ _ _ _ _ _ v) What is the risk-neutral probability of the stock price moving up? _ _ _ _ _ _

In a Cox-Ross-Rubinstein binomial tree, the formula for the proportional up-movement, u, is: choose one)

American options can be valued using a binomial tree by: choose one)

In a Cox-Ross-Rubinstein binomial tree, the relationship between the proportional down-movement, d, and the proportional up-movement, u, is: choose one)

Which two statements are true? choose two)