Question 1: The price of a stock is $45. The expected annual return on the stock is 15% and the volatility is 50%. What is the probability that the annual return for the next year is greater than 25%?
Question 2: Explain why the value of delta is close to 1 when a call is deep in the money and approximately 0.5 when it is at the money. If volatility increases what happens to the value of delta for an at the money option.
Question 3: Consider a two-period binomial tree model with u = 1.1 and d = 0.90. Suppose the current price of the stock is $50 and the nominal interest rate is 2%. What is the value of an American put with a strike price of $60 that will expire in 3 months?