In a One-Period Binomial Model with S_u = 49

question 31

Multiple Choice

In a one-period binomial model with S_u = 49.5,S_d = 40.5,p = 0.8,r = 0.06,S = 45 and X = 50,what is a European put worth?

• A)2.17
• B)0.50
• C)9.50
• D)5.00
• E)none of the above

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Definitions:

Compounded Semiannually

Compounded semiannually refers to the process of calculating interest on a principal sum and any accrued interest not only at the end of the year but also at a midpoint during the year, typically every six months.

Annual Interest

The amount of interest due over the course of a year on a loan or financial investment, typically expressed as a percentage of the principal.

Present Value

The current worth of a future sum of money or stream of cash flows given a specified rate of return, used to assess the attractiveness of investments or projects.

Compound Interest

Interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan.