6. You have implemented a butterfly spread whereby the strategy will make money if the stock...
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6. You have implemented a butterfly spread whereby the strategy will make money if the stock ends up between $44 and $56 (8 months from now). The stock currently trades at $48, its historical arithmetic average return is 12%, and its standard deviation is 30%. Compute the probability that you face of making a profit. The natural logarithm of the stock In(S+) is normally distributed with: mean = variance = sigma = The probability that In(S) is less than In(56) is thus: The probability that In(S) is less than In(44) is thus: The probability that In(S) is between In(44) and In(56) is therefore: The probability that S is between 44 and 56 is therefore: 6. You have implemented a butterfly spread whereby the strategy will make money if the stock ends up between $44 and $56 (8 months from now). The stock currently trades at $48, its historical arithmetic average return is 12%, and its standard deviation is 30%. Compute the probability that you face of making a profit. The natural logarithm of the stock In(S+) is normally distributed with: mean = variance = sigma = The probability that In(S) is less than In(56) is thus: The probability that In(S) is less than In(44) is thus: The probability that In(S) is between In(44) and In(56) is therefore: The probability that S is between 44 and 56 is therefore:
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Lets break down the problem step by step 1 Mean and Variance of Natural Logarithm of Stock The natural logarithm of a stocks price follows a lognormal ... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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