Assume that the true formula for pricing options is unknown, e.g., Black-Scholes is not applicable. Hence, you
Question:
Assume that the true formula for pricing options is unknown, e.g., Black-Scholes is not applicable. Hence, you are asked to use the following approximation for the insurance value of a put option:
Where S is the current price of the stock, K is the strike price, σ is the volatility of the stock return, and T is option maturity.
You are given that S = 100, K = 105, and the interest rate r = 1%. Option maturity is T = 1 year, and there are no dividends.
What is the maximum volatility for which early exercise of the option is induced?
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Step by Step Answer:
For the put to be exercised the sum of the puts time value and ...View the full answer
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