Consider a chooser option (also known as an as-you-like-it option) on two stocks. At time 1, its

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Consider a chooser option (also known as an as-you-like-it option) on two stocks. At time 1, its holder will choose whether it becomes a European option to exchange two units of Stock B for one unit of Stock A, or a European option to exchange one unit of Stock A for two units of Stock B. Both European exchange options will expire at time 3.

You are given:

(i) The time-0 price of Stock A is 205.

(ii) The time-0 price of Stock B is 100.

(iii) Both Stock A and Stock B pay dividends continuously at a rate proportional to their prices. They share the same dividend yield, which is 2%.

(iv) The time-0 price of a European option to exchange two units of Stock B for one unit of Stock A at time 1 is 5.

(v) The time-0 price of a European option to exchange two units of Stock B for one unit of Stock A at time 3 is 8.

Calculate the time-0 price of the chooser option.

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