21. With r 0:03 on a continuous basis, S0 100, and ln St1 St h...

21. With r ¼ 0:03 on a continuous basis, S0 ¼ 100, and ln Stþ1 St h i

@Nð0:12; ð0:18Þ2Þ

over annual periods:

(a) Determine the value of a 0:5-year binary call option on a stock with payo¤

function LðS0:5Þ ¼

10; S0:5 > 105;

0; S0:5a105:



(b) Evaluate the corresponding price for a binary put option, with payo¤ function LðS0:5Þ ¼

0; S0:5b105;

10; S0:5 < 105:



(c) Derive put-call parity for these binary options:

LPðS0Þ þ LCðS0Þ ¼ 10e0:015:

Assignment Exercises