etermine the value of the following American put option using both the bino- mial lattice and the Black-Scholes equation: asset price: $8; strike price: $10; risk-free rate: 5%; volatility: 40%; time to maturity: 5 months. For the binomial lattice use steps of 1 month. (i) (ii) (iii) Determine the value of the option if the volatility increases to 60% pa¹/2. Determine the value of the option if the risk-free rate increases to 12%. Comment on the results.

etermine the value of the following American put option using both the bino- mial lattice and the Black-Scholes equation: asset price: $8; strike price: $10; risk-free rate: 5%; volatility: 40%; time to maturity: 5 months. For the binomial lattice use steps of 1 month. (i) (ii) (iii) Determine the value of the option if the volatility increases to 60% pa¹/2. Determine the value of the option if the risk-free rate increases to 12%. Comment on the results.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter8: Financial Options And Applications In Corporate Finance

Section: Chapter Questions

Problem 5MC: In 1973, Fischer Black and Myron Scholes developed the Black-Scholes option pricing model (OPM). (1)...

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