The current price of security MLK is 89.50. Two periods from now the security will either be
Question:
The current price of security MLK is 89.50. Two periods from now the security will either be worth 120, 100 or 90. The one period risk free interest rate is 8.45%. There are three digital options traded. One pays \($1\) if MLK is at 120 two periods from now. This option is trading at 0.35. The second pays \($1\) if MLK is at 100 two periods from now. This option is trading at 0.25. The third pays \($1\) if MLK is at 90 two periods from now. This option is trading at 0.25.
1. Price a (two period) put option on MLK with exercise price K = 90.
2. Price a (two period) put option on MLK with exercise price K = 100.
3. Price a (two period) call option on MLK with exercise price K = 100.
4. Price a (two period) call option on MLK with exercise price K = 120.
Step by Step Answer:
Lectures On Corporate Finance
ISBN: 9789812568991
2nd Edition
Authors: Peter L Bossaerts, Bernt Arne Odegaard