Humidor Contract
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S0 = 75
X= $65
σ=40%
T = 1 year
This stock pays a dividend of 2% in 4 and 8 months. Using the Binomial Tree model, solve for the values of a European Put. For extra practice solve for an American put, European Call, and an American Call.
Step A: Using the Binomial Tree model, solve for the value of the following European Put
S0 = $50
X=$45
r = 3%
σ=35%
T=1 year
Step B: Calculate the delta for the nodes, A, B, C, D, E, and F
Step C: Suppose you purchased 100 of these $45.00 European puts at t=0. How would you remain delta neutral (delta hedge) at each of the nodes .
Explain what is meant by the following: The binomial model is a discrete time model, and the Black-Scholes-Merton model is a continuous time model.
What is the most critical variable in the Black-Scholes-Merton Model? Explain
Calculate the price of a three-month European put option on a non dividend paying stock with a strike price of $50 when the current stock price is $50, the risk free interest rate is 10% per annum, and the volatility is 30% per annum. (use the Black-Scholes-Merton model)