20) Suppose a non-dividend paying stock now sells at $100, and its price will be either $120 or $90 one year later. The risk-free rate is 9.531% per annum with continuous compounding (or equivalently 10% with annual compounding (or e0.09531x1=1.10-1=10%). Consider a one-year European put option on the stock with a strike price of $110. What are the payoffs of this put option at maturity?
a. f.= 0,f=20
b. f.= 20, f=0 c. fu= 0, f=10 d. fu= 10,f=0 Continuing with question 20, What should be the number of shares needed to construct a replicating portfolio for one long put option, according to the binomial pricing model?
a. -1/3 b. -2/3 c. -1/4 d. -3/4 Continuing with question 20, what should be the lending amount (or investment in a zero- coupon bond) needed to form a replicating portfolio for one long put option?
a. 54.54 b. 81.81999999999999 c. 72.73 d. 36.36 Continuing with question 20, what is the risk-neutral probability that the stock price will end up in the "up' state ($120) one year later? a. 2/3
b. 1/4 c. 3/4 d. 1/3 Continuing with question 20, if the risk-adjusted rate of return for this stock is 14% with annual compounding, what is the expected actual probability that the stock price will end up in the 'up' state ($120) one year later? a. 0.7
b. 0.8 c. 0.6 d. 0.4
