Financial DerivativesTU Board 2023
XYZ firm's stock is currently priced at Rs 200 per share. The option is available on this stock with the exercise price is Rs 200 per share. Six months from now its price will be either Rs 223.6 or…
10XYZ firm's stock is currently priced at Rs 200 per share. The option is available on this stock with the exercise price is Rs 200 per share. Six months from now its price will be either Rs 223.6 or Rs 178.88. If the price rises to Rs 223.6, then six months later the price will be either Rs 250 or Rs 200. If, however, the price initially falls to Rs 178.88, then six months later the price will be either Rs 200 or Rs 160. The risk-free rate is 4.08% over the six month period. Using the binomial option-pricing model, what is the fair value of a one-year call option on XYZ's stock? Suppose the actual call is selling for Rs 10, what would be your investment strategy.
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Value of a financial derivative depends upon value of underlying asset.TU Board 20241In the money put option has positive intrinsic value.TU Board 20241There is direct / positive relationship between value of call option with time to expiration.TU Board 20241When pricing a put with the binomial model, the up and down probabilities are reversed.TU Board 20241Both put option buyer and seller have the potential for unlimited losses.TU Board 20241If the initial margin is Rs 5,000, the maintenance margin is Rs 3,500 and your margin balance is Rs 4,000, you will receive margin call of Rs 500.TU Board 20241