2. (a) Compute the price of a European call option written on a non-dividend-paying stock. The current stock price is $100 and the volatility of the stock price is 30%. The maturity of the option is in three months and the strike price is $105. The risk free interest rate with continuous compounding is 3% per annum. You should use a three step (period) binomial model to price the option. (b) The option can be replicated by a portfolio consisting of the stock and a risk-free asset. What is the replicating portfolio strategy of the call option? (c) Explain how the delta should change, as the stock price increase and check if this is indeed the case in your tree.
2. (a) Compute the price of a European call option written on a non-dividend-paying stock. The current stock price is $100 and the volatility of the stock price is 30%. The maturity of the option is in three months and the strike price is $105. The risk free interest rate with continuous compounding is 3% per annum. You should use a three step (period) binomial model to price the option. (b) The option can be replicated by a portfolio consisting of the stock and a risk-free asset. What is the replicating portfolio strategy of the call option? (c) Explain how the delta should change, as the stock price increase and check if this is indeed the case in your tree.
Chapter5: Currency Derivatives
Section: Chapter Questions
Problem 5ST
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