Research paper, 2200 words doc, finance world and derivatives

Tom Curtis has prepared a hypothetical problem for you and your group
to solve. He wants you to utilize the two-period binomial option
pricing model to solve certain problems. If your team passes this test,
you might soon be developing derivative strategies for Ricardo
International to use.

Individual Portion – 700 words

Individually conduct research on two different models used to price
call options. Detail each model in a Word document and focus on
comparing and contrasting the models. Post your document to the Small
Group Discussion Board.


Team work – 1500 words

As a group, combine your efforts to solve the following:

Consider a two-period, two-state world. Let the current stock price
be $35 and the risk-free rate be 5%. In each period, the stock price can
either go up by 10% or down by 10%. A call option expiring at the end
of the second period has an exercise price of $30.

  1. Find the stock price sequence. Explain. (300 words)
  2. Determine the possible prices of the call at expiration. Explain (300 words)
  3. Find the possible prices of the call at the end of the first period. Explain (300 words)
  4. What is the current price of the call? Explain (300 words)
  5. What is the initial hedge ratio? Explain (300 words)

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