Humidor Contract

S0 = 75 X= $65 σ=40% r=5% T = 1 year N=3

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.

3. 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 N=3

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 .

4. 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.

5. What is the most critical variable in the Black-Scholes-Merton Model? Explain

6. 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)