Question

The contract issued by standard oil some time ago worked as follows. at the maturity time t, the company promised to pay $1, 000 plus an additional amount based on the price of oil at that time. the additional amount was equal to the product of 170 and the excess (if any) of the price of a barrel of oil at maturity over $25. the maximum additional amount paid was $2, 550 (which corresponds to a price of $40 per barrel). assume that the price st of a barrel of oil now follows a 3-step binomial tree model. assume that in this binomial tree model, s0What was the additional amount paid based on the price of oil at maturity?

A. The product of 170 and the excess over $25
B. $1,000 plus $2,550
C. The excess over $25
D. $2,550

Answer 1

The additional amount paid based on the price of oil at maturity is determined by a formula, but without the specific parameters of the binomial tree model, we cannot determine the exact additional amount. However, we know that the maximum additional amount of $2,550 would be paid if the price of oil at maturity is $40 per barrel or higher.

Step-by-step explanation:

The additional amount paid based on the price of oil at maturity can be calculated using the given formula: additional amount = 170 * (price of oil - $25). However, it is mentioned that the maximum additional amount paid is $2,550, which corresponds to a price of $40 per barrel. To find the additional amount, we need to determine the price of oil at maturity.

Since the price of a barrel of oil follows a 3-step binomial tree model, we would need additional information about the parameters of the model, such as the risk-neutral probability, the up and down factors, and the time step. With these parameters, we can calculate the price of oil at maturity and then use the formula to find the additional amount paid.

Without the specific parameters of the binomial tree model, we cannot determine the exact additional amount paid based on the price of oil at maturity. However, we can conclude that the maximum additional amount of $2,550 would be paid if the price of oil at maturity is $40 per barrel or higher.