A knockout call option loses all value at the instant the price of the stock drops below

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A knockout call option loses all value at the instant the price of the stock drops below a given “knockout level.” Determine a fair price for a knockout call option when the current stock price is $20, the exercise price is $21, the knockout price is $19.50, the mean annual growth rate of the stock is 12%, the annual volatility is 40%, the risk-free rate is 10%, and the exercise date is 1 month from now (where we assume there are 21 trading days in the month and 250 in a year).

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Practical Management Science, Revised

ISBN: 9781118373439

3rd Edition

Authors: Wayne L Winston, S. Christian Albright

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