Suppose there are only two possible future states of the world. In state 1 the stock price rises by 50%. In state 2, the stock price drops by 25%.

Question 7. Assume a N = 2 step binomial model for stock with spot price S = £400, one-step up price Su = £550 and down price Sd = £350. Price European call ...

However, in the binomial model the call option price can be zero before maturity even if the volatility is positive. Why are the two models different?

Use the Black-Scholes model to determine the maximum amount that the company should be willing to pay for the lease. When solving a question dealing with real ...

(a) Use the binomial option pricing model to determine if an arbitrage opportunity exists. (b) If one exists, what transactions should you enter into at ...

(2 points) In the binomial asset pricing model, the number of shares ∆ of the underlying asset in the replicating portfolio for a put option is always positive.

If a stock price moves in a manner consistent with the binomial model, what is the chance that the stock price will be the same for two periods in a row?

(5 points) Consider the one-period binomial option pricing model. Let VC(0) > 0 denote the price of a European call on a stock which pays continuous dividends.

Under the binomial model, the stock can take on three possible prices at time two: Suu, Sud, and Sdd. – There are 4 paths. – But the tree combines. • At any ...

• Deriving the two-period binomial option pricing formula. 3. Multi-Step Cox-Ross-Rubinstein (CRR) Binomial Model. • Binomial model of asset price dynamics.