Consider a model with two nondividend-paying stocks, Stock 1 and Stock 2, and a special 5-year European
Question:
Consider a model with two nondividend-paying stocks, Stock 1 and Stock 2, and a special 5-year European straddle on Stock 1, with a strike price given by the 5-year price of Stock 2.
You are given:
(i) The current prices of Stock 1 and Stock 2 are both 60.
(ii) Stock 1’s volatility is 40%.
(iii) Stock 2’s volatility is 50%.
(iv) The continuously compounded risk-free interest rate is 6%.
(v) The current price of the straddle is 72.
Calculate the correlation coefficient between the continuously compounded returns of the two stocks.
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Calculating Correlation Coefficient Given S1 S2 60 Current prices of Stock 1 and Stock 2 1 04 Volati...View the full answer
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