Consider a two-period economy with annual risk-free interest rate of 3% in both periods. The current stock price is $100, and u=1.15 and d=0.75 for each period. (a) Find the current market value (at time 0) of an European call option on the stock with an exercise price of $90 that expires at the end of the second period. (b) Using the same method if valuation, find the current market value (time 0) of an European style put option on the stock price of $90 that expires at the end of the second period. (c) Use the put-call parity to derive the value of European style put option and compare it to the value you obtained in part (b).
Consider a two-period economy with annual risk-free interest rate of 3% in both periods. The current stock price is $100, and u=1.15 and d=0.75 for each period. (a) Find the current market value (at time 0) of an European call option on the stock with an exercise price of $90 that expires at the end of the second period. (b) Using the same method if valuation, find the current market value (time 0) of an European style put option on the stock price of $90 that expires at the end of the second period. (c) Use the put-call parity to derive the value of European style put option and compare it to the value you obtained in part (b).
Chapter5: Currency Derivatives
Section: Chapter Questions
Problem 3BIC
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Transcribed Image Text:Consider a two-period economy with annual risk-free interest rate of 3% in both periods.
The current stock price is $100, and u=1.15 and d=0.75 for each period.
(a) Find the current market value (at time 0) of an European call option on the stock with
an exercise price of $90 that expires at the end of the second period.
(b) Using the same method if valuation, find the current market value (time 0) of an
European style put option on the stock price of $90 that expires at the end of the second
period.
(c) Use the put-call parity to derive the value of European style put option and compare it
to the value you obtained in part (b).
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