Consider a European call option on a non-dividend-paying stock where the stock price is $52, the strike price $50, the risk-free rate is 5%, the

Consider a European call option on a non-dividend-paying stock where thestock price is $52, the strike price $50, the risk-free rate is 5%, the volatilityis 30%, and the time to maturity is one year. Answer the following questionsassuming no recovery in the event of default, that the probability of defaultis independent of the option valuation, no collateral is posted, and no othertransactions between the parties are outstanding.(a) What is the value of the option assuming no possibility of a default?(b) What is the value of the option to the buyer if there is a 2% chance thatthe option seller will default at maturity?(c) Suppose that, instead of paying the option price up front, the option buyeragrees to pay the forward value of the option price at the end of option’slife. By how much does this reduce the cost of defaults to the option buyerin the case where there is a 2% chance of the option seller defaulting?(d) If in case (c) the option buyer has a 1% chance of defaulting at the end ofthe life of the option, what is the default risk to the option seller? Discussthe two-sided nature of default risk in the case and the value of the optionto each side.







Calculate Your Essay Price
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more

Order your essay today and save 10% with the coupon code: best10