Using a binomial pricing model, what is the impact on the price of a call option if the company increases the dividend paid to shareholders? The call option price:
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The model considers two possible outcomes for the asset price at each step: an increase (up) or a decrease (down). Show more…
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Suppose you own a call option on Apple stock with a strike price of $150. The option will expire one year from today. Suppose Apple will not pay dividends in the next year. The annual risk-free rate of interest is 3%. The current stock price of Apple is $170 per share. Suppose that the price at which the call option is selling in the market increases from $30.81 to $35 (holding everything else constant). What has happened to the implied volatility of Apple stock? Group of answer choices It has not changed. It has increased. It has decreased. There is insufficient information provided to draw any conclusions.
Akash M.
How would delta change as the strike price goes up?
Nick J.
Consider an N-period binomial model for a non-dividend paying stock where the true probability of an up-move in each period is given by p = 0.5. The initial value of the stock is S0 = $100. Let C0 denote the time t = 0 price of a European call option on the stock with strike K that expires after N periods. Now suppose that some extremely favorable news about the stock has just been announced so that while S0 still remains at $100, the probability of an up-move in each period has increased dramatically so that now p = 0.999. What will happen to C0? Justify your answer. Is this what you would expect in practice? Again, justify your answer.
Supreeta N.
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