Q-1. The current stock price be SAR 50 and that can go up or down by 20 percent per period. The risk-free rate is 10 percent. Use one binomial period. (5 Marks)
a) Determine the two possible stock prices for the next period. (1 Mark)
b) Determine the intrinsic values at expiration of a European call option with an exercise price of SAR 45. (1.5 Marks)
c) Find the value of the option today. (1.5 Marks)
d) Calculate the hedge ratio. (1 Mark)
Q-2. Explain the concept of moneyness? (3 Marks)
Q-3. Explain the Options and discuss the difference between American and European options.