Questions -
Q1. Imagine that a stock is currently trading for $100. The price is expected to go up to $120 or down to $90, in the next year. No other possibilities exist. Assuming the risk- free rate is 10% construct a binomial tree and value a call option on this stock with an expiration of 6 months, and a strike price of $100. Please show all of your work.
Q2. You are considering purchasing 500 call options on the common stock of the big candy store, Inc. The stock is currently trading at $37.10 per share. The 3-month option can be purchased for $2.07 per share, and has an exercise price of 41.00. Assuming the stock is trading at $42.11 at the time of expiration of the option, what is the payoff? What is the profit / loss?
Q3. A. Given the following scenarios based on ABC, Inc. common stock, calculate the Expected Return, Variance, and Standard Deviation of the returns.
|
Scenario
|
Probability
|
HPR(%)
|
|
Server recession
|
0.15
|
-27
|
|
Mid recession
|
0.15
|
-11
|
|
Normal growth
|
0.40
|
10
|
|
Boom
|
0.30
|
21
|
B. Assuming we create a portfolio consisting 40% of the above stock. And 60% of bonds with the following possible return. Calculate The Expected Return. Variance, and Standard deviation of the portfolio.
|
Scenario
|
Probability
|
HPR(%)
|
|
Server recession
|
0.15
|
-9
|
|
Mid recession
|
0.15
|
12
|
|
Normal growth
|
0.40
|
8
|
|
Boom
|
0.30
|
-5
|