Use the following information to answer questions 7-16 Consider the following bi

Question

Use the following information to answer questions 7-16

Consider the following binomial tree. The numbers in squares are stock prices. The numbers in circles will be option prices (# numbers are the exercise numbers to answer your calculation).

Use the computed q to sweep back through the tree to fill the call values in circles. For each node use the formula:   C = q Cu + (1-q) Cd. Ignore interest.

Q7: Compute the probability of the up-step: q =

Q8: #8           Call Value =

Q9: #9           Call Value =

Q10:   #10         Call Value =

Q11: #11         Call Value =

Q12: #12         Call Value =

Q13: #13         Today’s Call Value=

Q15: Exercise #15. Today’s call premium is: $______

Q16:Exercise #16. Interpret the delta. If you sell a call option on one hundred shares, the delta hedge will require you to buy _______________ shares of stock (how many?).

Please shows the works, thank you

Explanation / Answer

I can answer only four question as per the chegg guidelines

Q7 preobaility of uptick= (S0- Sd)/( Su -Sd)

S0=110

Sd=100

Su=120

P= (110-100)/(120-100) = 10/20=0.5

Hence downwards tick q = 1-0.5 = 0.5

Q8 For 120 call value = 120-90 =30

Q9For 100 call value would be =100-90 =10

Q10 For 80 call value =0 since value below stock price

Q11 Call value at node #8 * 0.5 + Call Value at node # 9 * 0.5

=0.5*30+ 0.5*10 == 25

Q12Call value at node #9 * 0.5 + Call Value at node # 10 *

= 10*.5 =5

Q13 Todays call value =0.5* 5 +0.5*25 = 15

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