HullFund8eCh12ProblemSolutions讲解.docx

1、HullFund8eCh12ProblemSolutions讲解CHAPTER 12Introduction to Binomial TreesPractice QuestionsProblem 12.8.Consider the situation in which stock price movements during the life of a European option are governed by a two-step binomial tree. Explain why it is not possible to set up a position in the stock

2、 and the option that remains riskless for the whole of the life of the option. The riskless portfolio consists of a short position in the option and a long position in shares. Because changes during the life of the option, this riskless portfolio must also change. Problem 12.9.A stock price is curre

3、ntly $50. It is known that at the end of two months it will be either $53 or $48. The risk-free interest rate is 10% per annum with continuous compounding. What is the value of a two-month European call option with a strikeprice of $49? Use no-arbitrage arguments. At the end of two months the value

4、of the option will be either $4 (if the stock price is $53) or $0 (if the stock price is $48). Consider a portfolio consisting of: The value of the portfolio is either or in two months. If i.e., the value of the portfolio is certain to be 38.4. For this value of the portfolio is therefore riskless.

5、The current value of the portfolio is: where is the value of the option. Since the portfolio must earn the risk-free rate of interest i.e., The value of the option is therefore $2.23. This can also be calculated directly from equations (12.2) and (12.3). , so that and Problem 12.10.A stock price is

6、currently $80. It is known that at the end of four months it will be either $75 or $85. The risk-free interest rate is 5% per annum with continuous compounding. What is the value of a four-month European put option with a strikeprice of $80? Use no-arbitrage arguments. At the end of four months the

7、value of the option will be either $5 (if the stock price is $75) or $0 (if the stock price is $85). Consider a portfolio consisting of: (Note: The delta, of a put option is negative. We have constructed the portfolio so that it is +1 option and shares rather than option and shares so that the initi

8、al investment is positive.) The value of the portfolio is either or in four months. If i.e., the value of the portfolio is certain to be 42.5. For this value of the portfolio is therefore riskless. The current value of the portfolio is: where is the value of the option. Since the portfolio is riskle

9、ss i.e., The value of the option is therefore $1.80. This can also be calculated directly from equations (12.2) and (12.3). , so that and Problem 12.11.A stock price is currently $40. It is known that at the end of three months it will be either $45 or $35. The risk-free rate of interest with quarte

10、rly compounding is 8% per annum. Calculate the value of a three-month European put option on the stock with an exercise price of $40. Verify that no-arbitrage arguments and risk-neutral valuation arguments give the same answers. At the end of three months the value of the option is either $5 (if the

11、 stock price is $35) or $0 (if the stock price is $45). Consider a portfolio consisting of: (Note: The delta, , of a put option is negative. We have constructed the portfolio so that it is +1 option and shares rather than option and shares so that the initial investment is positive.) The value of th

12、e portfolio is either or . If: i.e., the value of the portfolio is certain to be 22.5. For this value of the portfolio is therefore riskless. The current value of the portfolio is where f is the value of the option. Since the portfolio must earn the risk-free rate of interest Hence i.e., the value o

13、f the option is $2.06. This can also be calculated using risk-neutral valuation. Suppose that is the probability of an upward stock price movement in a risk-neutral world. We must have i.e., or: The expected value of the option in a risk-neutral world is: This has a present value of This is consiste

14、nt with the no-arbitrage answer. Problem 12.12.A stock price is currently $50. Over each of the next two three-month periods it is expected to go up by 6% or down by 5%. The risk-free interest rate is 5% per annum with continuous compounding. What is the value of a six-month European call option wit

15、h a strike price of $51? A tree describing the behavior of the stock price is shown in Figure S12.1. The risk-neutral probability of an up move, p, is given by There is a payoff from the option of for the highest final node (which corresponds to two up moves) zero in all other cases. The value of the option is therefore This can also be calculated by working back through the tree as indicated in Figure S12.1. The value of the call option is the lower number at each node in the figure. Figure S12.1 Tree for Problem 12.12Problem 12.13.For the situation considered in Proble