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4.- The share price of ABC stock is $40 and in eight months it will be either $35 or $50. Interest is compounded continuously at
4.- The share price of ABC stock is $40 and in eight months it will be either $35 or $50. Interest is compounded continuously at at rate of 9%. (a) Find the arbitrage-free price of a call option on one share of ABC stock expiring in eight months with exercise price of $43. (b) Find the arbitrage-free price of a put option on one share of ABC stock expiring in eight months with exercise price of $43. (c) Suppose Pikachu believes that the fair price of a call option is $7 and it is willing to buy the call option at that price. Create a portfolio (Draw a table) that creates an arbitrage. (d) what is the fair-price of the call in part (a) if K = 48
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