You use the following information to construct a binomial forward tree for modeling the price movements of

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You use the following information to construct a binomial forward tree for modeling the price movements of a nondividend-paying stock:

(i) The length of each period is 4 months.

(ii) The current stock price is 123.

(iii) The stock’s volatility is 30%.

(iv) The continuously compounded risk-free interest rate is 8%.

(v) The continuously compounded expected return on the stock is 12%.

Calculate the continuously compounded expected rate of return on a 120-strike 1-year European call option over its 1-year life.

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Derivative Pricing

ISBN: 9780367734213

1st Edition

Authors: Ambrose Lo

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Question Posted: Nov 22, 2023 08:05 AM

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You use the following information to construct a binomial forward tree for modeling the price movements of

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To calculate the continuously compounded expected rate of return on a 1year European call option with a 120strike we will use the binomial forward tre...View the full answer

Derivative Pricing

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