XYZ's stock is currently worth $20 per share while the stock's return standard deviation is 24% p.a.
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Question:
XYZ's stock is currently worth $20 per share while the stock's return standard deviation is 24% p.a. A financial institution has just sold a six-month exotic derivative on the stock. The cash flow the derivative provides to the owner of the derivative at maturity is equal to | ||||||||
max [ST2 400, 50] | ||||||||
ST is the underlying stock price at maturity. The current risk-free rate is 7% p.a. continuously compounded. The company used a binomial tree with a time-step equal to 3 months to derive the price of the derivative security. Use the same tree to determine the action the company must initially take to hedge the risk from the sale. The action is closest to: |
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