Derivagem Finance Assignment Help With Solution

Q1. Derivagem is useful for pricing options but it has some limitations. Explain why it’s impossible to solve Q12.5 in page 293 with Derivagem.

Q2. A stock price is currently $100. Over each of the next three six-month periods, it is expected to go up by 8% or down by 8%. The risk-free interest rate is 2% per annum.

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a. What is dt, the length of one period?

b. What is u, the up factor? Note that the answer is not 10%.

c. What is d, the down factor?

d. Calculate p, the risk-neutral probability that the stock price will go up next period.

Hint: End of chapter 12, Q5

For Q3 and Q4, use the following information.

A non-dividend paying stock is currently trading at $100 and its volatility is 40%. Consider a put option on this stock, with a strike price of $110, expiring in 1.5 years. The current risk-free rate is 2% per annum. We will price the put option with a 3-step binomial tree (the number of steps = 3).

Q3. First, calculate the European put option price in a spreadsheet. Then use Derivagem to price it. Confirm these 2 prices match. Include the Derivagem output (screenshot or copy paste).

Q4. Calculate the American put option price in a spreadsheet. Then use Derivagem to price it and confirm. These 2 prices must match but will be higher than Q3 answer. Include the Derivagem output.

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