Task
In this assignment, you will solve problems on Binomial Option Pricing.
Instructions
- Use your textbook to answer the following questions from Chapter 11:
- Exercise 9, 10, and 19.
- Please, upload xls, xlsx file.
- Please, use the full computing power of Excel.
9. ABC stock is currently at 100. In the next period, the price will either increase by 10%
or decrease by 10%. The risk-free rate of return per period is 2%. Consider a call option
on ABC stock with strike K = 100.
(a) Set up a replicating portfolio to value the call.
(b) Suppose the call is trading for $7. Explain how you would exploit the resulting
arbitrage opportunity.
10. ABC stock is currently at 100. In the next period, the price will either increase by 5% or
decrease by 5%. The risk-free rate of return per period is 3%. Consider a put option on
ABC stock with strike K = 100.
(a) Set up a replicating portfolio to value the put.
(b) Suppose the put is trading for $2. Explain how you would exploit the resulting
arbitrage opportunity
19. Portfolio insurance: The current price of the stock we are holding is $100. We want to
continue to hold the stock position but modify it so that the portfolio value never drops
below $90. If the stock may move up to $130 or down to $80 after one period, how do
we modify our holding of $100 so as to make sure that it is at least of $90 value at the
end of the period? The rate of simple interest for the period is 10%.
