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# This is not an essay assignment, this is a problem set. there are 2 questions in the word doc.

This is not an essay assignment, this is a problem set. there are 2 questions in the word doc.
Answered 1 days After Dec 04, 2022

## Solution

Rochak answered on Dec 06 2022
a. The risk-less portfolio will be one which will be convenient because the 6% return will ensure that the return I will get is guaranteed. The same will not be possible for a risky venture which will not provide a significant guarantee on the returns and therefore the same is not convenient to me.
. Probability
p = Probability that the stock price will go up
q = Probability that the stock price will go down
p = ((1+(Time Period*Risk free rate)) â€“ Downward Factor)/(Upward Factor â€“ Downward Factor)
= ((1+(0.33*6%)-0.96)/(1.05-0.96)
= 0.66
q = 1 â€“ p
= 1 â€“ 0.66
= 0.34
c. Present Value
Node Time (yrs)
Â
0.00
Â
0.33
Â
0.66
Â
0.99

44.10

46.31

5.65

8.31

42.00

3.83

Stock

40.00

40.32

38.71
Option

2.65

0.46

0.71

38.40

0.45

36.86

35.39

0.46

-
At t = 1,
C+ = Max(0,46.31-38) = 8.31
C-+ = Max(0,38.71-38) = 0.71
C-- = Max(0,35.39-38) = 0
At t = 0.66
C+ = (Upward Probability * C+ + Downward Probability *C+-)/(1+Risk free rate)* Time period
= 5.65
C+- = (Upward Probability * C+- + Downward Probability...
SOLUTION.PDF