Apple stock is currently trading at $170. Assume that Apple stock can go up by...
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Apple stock is currently trading at $170. Assume that Apple stock can go up by 15% (U = 1.15) or down by 8% (D = 0.92) in each period (3-month). The risk free rate is 4% annual (r = 1 + 4%/4). The exercise price of call and put options considered on Apple stock is $165.
Estimate the following:
a. Develop a 4-period stock price, call and put pay-offs in the possible states (Binomial)
b. Compute Apple 4-period Call Option Price today (Binomial)
c. Compute Apple 4-period Put Option Price today (Binomial)
d. Show that the Put-Call Parity works
e. This Apple call option is now trading at $17 with an implied volatility of 40%. If the historical observed volatility of Apple is 26%, provide a trading recommendation for this Apple Call Option with your rationale.
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