‘At-the-money-forward’ options The stock of ABC Inc. currently trades at $100 and does not pay any dividend. Analysts predict that the price may rise or fall by 10% every 6 months and that the risk-free rate will remain at 5% per annum for all maturities.
(a) Sketch a binomial tree for the evolution of the stock price over the next year.
(b) Calculate the 1-year forward price F of ABC Inc.’s stock.
(c) Calculate the value of a 1-year European call on ABC Inc. with strike F. What about a European put with identical characteristics (underlying, strike, maturity)?