Consider the stock described in Exercise 20 and assume the risk-free rate = 0.05. (a) Find
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Consider the stock described in Exercise 20 and assume the risk-free rate δ = 0.05.
(a) Find the prices for a put and call option with an exercise price of K = $100 and maturity time T = 6 months. Show why the general formula becomes simpler in this case.
(b) Richard has an $100 bet with John that at time T = 6 months the stock price will be 5% larger than the original. Who to whom and how much should pay at time t = 0, for the bet to be fair?
Exercise 20
Let a stock price process St be a geometric Brownian motion with an annual volatility of σ = 0.1, and an expected annual return of m = 0.15 per annum. Let S0 = 100.
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a This is a straightforward exercise on the BlackScholes formula with ...View the full answer
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