You are to price options using a binomial model. The expiration is in 3 weeks an

Question

You are to price options using a binomial model. The expiration is in 3 weeks and we will use a time step of 1/52 (1 week). So there are 3 time steps (one more than the in-class examples). The price of a stock is S(0)-$48. The risk-free rate is r-6% The strike is X=50 and K = 596. A) Determine the price of a call and put and verify that the lower bounds and B) Determine the value of the put with the addition that it can be redeemed for C) Determine and explain (short answer) what happens to the (original) call and D) Determine and explain (short answer) the price of the call and put when S(0) put-call parity are met $1. What is the redemption option worth? put price when K changes to 3% (Don't forget p changes too!) changes to 50. From this, estimate the change in option price per $1 change in the underlying stock price.

Explanation / Answer

B ) If PUT Option can be redeemed in $1 the its price should be 1 + Put Option Intrisic value + time value premium

C) IF K change 3 %, Premium will get down. As a result Call Premium and Put Premium will be reduced. As call price is already zero, it is put price which will reduced

D ) If it increase then Put Price will decrease and and call price increase and vice versa.

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