FI 4000 Binomial Option Pricing Sample Problems 1 The price of Gyrostat Corp stock will be either 75 or 95 at the end of the year European call and put options are available with expiration at the end of the year Gyrostat will not pay any dividend until after the end of then year The risk free rate for the time remaining till the end of the year is 5 a Suppose the current price of Gyrostat stock is 90 What is the value of a call option on Gyrostat stock with exercise price 70 b Suppose the exercise price in part a is 90 What is the value of the call option c What is the value of a put option on Gyrostat stock with exercise price 90 and current stock price 90 d Suppose in part c that the exercise price is 87 What is the value of the put 2 The price of 3Cube stock will be either 30 of 50 at the end of the year European call and put options are available with expiration at the end of the year 3Cube will not pay any dividend until after the end of then year The risk free rate for the time remaining till the end of the year is 7 a Suppose the current price of 3Cube is 35 What is the value of a call option with exercise price 40 b For the data in part a what is the value of a put option with exercise price of 45 c For the options in parts a and b what would be their value now if they were American options in the sense that they could be exercised now or at year end What would be the optimal exercise strategy for each option 3 American call and put options on the stock of Wombat Corporation are due to expire in two periods Wombat is not expected to pay a dividend before these options expire The current stock price is 100 and the price at the end of the first period will be either 125 or 80 If the price is 125 at the end of the first period then it will be either 156 25 or 100 at the end of the second period If the price of the stock is 80 at the end of the first period it will be either 100 or 64 at the end of the second period The yield curve for the next two periods is flat at 10 a What is the value today of a call option on Wombat stock with exercise price of 110 Compute the early exercise premium b What is the value today of a put option on Wombat stock with exercise price of 110 Compute the early exercise premium
View Full Document