Question: Assume the Black-Scholes framework. Consider two nondividend-paying stocks whose time-t prices are denoted by S 1 (t) and S 2 (t), respectively. You are given:

Assume the Black-Scholes framework. Consider two nondividend-paying stocks whose time-t prices are denoted by S1(t) and S2(t), respectively.

You are given:

(i) S1(0) = $100 and S2(0) = $150.

(ii) Stock 1’s volatility is 30%.

(iii) Stock 2’s volatility is 40%.

(iv) The continuously compounded risk-free interest rate is 4%.

(v) The price of a 2-year European contingent claim which pays max (1.5S1(2), S2(2)) is 201.

Calculate the correlation coefficient between the continuously compounded returns of the two stocks.

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