Microsoft Word - Finance Assignment.docx Total Marks: 50 marks GUIDELINES: ASSIGNMENT LAYOUT AND PRESENTATION Your document should be typed in Times New Roman font, size 12. The assignment should be...

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Microsoft Word - Finance Assignment.docx Total Marks: 50 marks GUIDELINES: ASSIGNMENT LAYOUT AND PRESENTATION Your document should be typed in Times New Roman font, size 12. The assignment should be double spaced and have margins of 2.54 cm. For calculation questions, you need to show all your workings (including timeline if appropriate) and round your answers to three decimal places. Question 1 (5 Marks) (i) The stock of Company ABC is currently trading at a price of $50. According to analyst forecasts, the share price will be either $45 or $55 at the end of six months. Suppose that the risk-free interest rate is 10% per annum with continuous compounding. What is the value of a six-month European put option with a strike price of $50 using the Delta-hedging method? (3 marks) (ii) Verify your result in part (i) using the Risk-neutral method. (2 marks) Question 2 (15 marks) A stock is currently traded at $60. The standard deviation of the stock return is 30% per annum. The riskless interest rate is 5% per annum. The terminal payoff of the derivative is specified as: Payoff = 3 ST + 10 (i) Suppose that the derivative is a knock-out option with one year remaining. The barrier is set at $80. Construct a four-step binomial tree to price this barrier option. (6 marks) (ii) Suppose that the derivative is a knock-in option with one year remaining. The barrier is set at $80. Construct a four-step binomial tree to price this barrier option. (6 marks) (iii) Suppose that the derivative is a normal European style option with one year remaining (i.e., it does not have the barrier). Without constructing a binomial tree, what is the price of this European option? Justify your answers. (3 marks) Question 4 (17 Marks) For a levered firm, firm’s assets are financed by equity and debt.

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Answered 6 days AfterOct 11, 2021

Answer To: Microsoft Word - Finance Assignment.docx Total Marks: 50 marks GUIDELINES: ASSIGNMENT LAYOUT AND...

Sugandh answered on Oct 18 2021

129 Votes

Case Analysis
Question 1
a)
b) The system will be defined in a process where the put and the delta value is verified to make understand that the system is tot
Question 2
1) and 2)
3)
Binomial approach the expected stock price will be computed as follows:-
3* Multiply * St +10
3* multiply * (Stock price now * Exp * (Risk free rate)) + 10
Present value of option = 3 * 60 + 10 Exp (-5%)
The computation will be computed as follows: - 189.51
Question 3
i) X1 < X2 < X3 and the X3 – X2 = X2- X1
Constructing the equation we get as follows:-
P2 The Equation Co > Max [01 S0 – XB 01]
= Mars [0.55 – 5 cot – 0.12 (3/12)] = $ 6.48
ii) Using the results in the part

Put call parity is
C+PV (X) = S + P
I.e. P = C + PV (x) – S
= C + Constant Zero
I.e. Since x1< x2< x3 and x3 – x2 = x2- x1
Henceforth, it is evident that the condition P2 Question 4
Part A
1) In relation to the call option the face value of the organization is definitely in terms with the strike price or the exercise...

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Microsoft Word - Finance Assignment.docx Total Marks: 50 marks GUIDELINES: ASSIGNMENT LAYOUT AND PRESENTATION Your document should be typed in Times New Roman font, size 12. The assignment should be...

Answer To: Microsoft Word - Finance Assignment.docx Total Marks: 50 marks GUIDELINES: ASSIGNMENT LAYOUT AND...

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