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Harbin Manufacturing has 10 million shares outstanding with a current share price of $24.07 per share....

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Finance

Harbin Manufacturing has 10 million shares outstanding with acurrent share price of $24.07 per share. In one? year, the shareprice is equally likely to be $30 or $20. The? risk-free interestrate is 6%.

a. Using the? risk-neutral probabilities, what is the value ofa? one-year call option on Harbin stock with a strike price of$25??

b. What is the expected return of the call? option?

c. Using the? risk-neutral probabilities, what is the value ofa? one-year put option on Harbin stock with a strike price of $25??d. What is the expected return of the put? option?

Answer & Explanation Solved by verified expert
4.0 Ratings (718 Votes)
First of all we shall look up at the formula of risk neutral probability for an up move 1 r d u d where r risk free interest rate d down move factor which is calculated as stocks down price divided by stocks current price u up move factor which is calculated as stocks up price divided by stocks current price Now we shall    See Answer
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Harbin Manufacturing has 10 million shares outstanding with acurrent share price of $24.07 per share. In one? year, the shareprice is equally likely to be $30 or $20. The? risk-free interestrate is 6%.a. Using the? risk-neutral probabilities, what is the value ofa? one-year call option on Harbin stock with a strike price of$25??b. What is the expected return of the call? option?c. Using the? risk-neutral probabilities, what is the value ofa? one-year put option on Harbin stock with a strike price of $25??d. What is the expected return of the put? option?

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