Assume the Black-Scholes framework. Eight months ago, an investor borrowed money at the risk-free interest rate to

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Assume the Black-Scholes framework.

Eight months ago, an investor borrowed money at the risk-free interest rate to purchase a one-year 75-strike European call option on a nondividend-paying stock. At that time, the price of the call option was 8.

Today, the stock price is 85. The investor decides to close out all positions.

You are given:

(i) The continuously compounded risk-free interest rate is 5%.

(ii) The stock’s volatility is 26%.

Calculate the eight-month holding profit.

(A) 4.06

(B) 4.20

(D) 4.33

(E) 4.47

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Derivative Pricing

ISBN: 9780367734213

1st Edition

Authors: Ambrose Lo

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Question Posted: Nov 22, 2023 08:17 AM

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Assume the Black-Scholes framework. Eight months ago, an investor borrowed money at the risk-free interest rate to

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A Eight months after the purchase of the call the remaining time to expiratio...View the full answer

Derivative Pricing

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