This is not an essay assignment, this is a problem set. there are 2 questions in the word doc.

Question

Rochak · Accepted Answer

Answer 2:
a. The risk-less portfolio will be one which will be convenient because the 6% return will ensure that the return I will get is guaranteed. The same will not be possible for a risky venture which will not provide a significant guarantee on the returns and therefore the same is not convenient to me.
b. Probability
p = Probability that the stock price will go up
q = Probability that the stock price will go down
p = ((1+(Time Period*Risk free rate)) – Downward Factor)/(Upward Factor – Downward Factor)
= ((1+(0.33*6%)-0.96)/(1.05-0.96)
= 0.66
q = 1 – p
= 1 – 0.66
= 0.34
c. Present Value
	Node Time (yrs)
	 
	0.00
	 
	                  0.33 
	 
	                  0.66 
	 
	                  0.99 
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	                44.10 
	
	                46.31 
	
	
	
	
	
	
	                  5.65 
	
	                  8.31 
	
	
	
	
	                42.00 
	
	
	
	
	
	
	
	
	                  3.83 
	
	
	
	
	Stock
	
	                40.00 
	
	
	
	                40.32 
	
	                38.71 
	Option
	
	                  2.65 
	
	
	
	                  0.46 
	
	                  0.71 
	
	
	
	
	                38.40 
	
	
	
	
	
	
	
	
	                  0.45 
	
	
	
	
	
	
	
	
	
	
	                36.86 
	
	                35.39 
	
	
	
	
	
	
	                  0.46 
	
	                     -   
At t = 1,
C+ = Max(0,46.31-38) = 8.31
C-+ = Max(0,38.71-38) = 0.71
C-- = Max(0,35.39-38) = 0
At t = 0.66
C+ = (Upward Probability * C+ + Downward Probability *C+-)/(1+Risk free rate)* Time period
= 5.

This is not an essay assignment, this is a problem set. there are 2 questions in the word doc.

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment