A market has two stocks, IBB and IMM; IBB is worth $1.25 today, and after one year
Fantastic news! We've Found the answer you've been seeking!
Question:
A market has two stocks, IBB and IMM; IBB is worth $1.25 today, and after one year
it can be worth either $2 or $0.5. IMM can also be worth either $2 or $0.5 in a year, but
we do not know its price today.
We do know, however, that the option that pays $1 when both IBB and IMM go up in
price (and 0 otherwise) is worth $0.3, and the option that is pays $1 when both IBB and
IMM go down (and 0 otherwise) is worth $0.2. Money can be borrowed at 0% per year
using a bond.
Find:
. The price of IMM today
. The risk neutral joint probabilities for the stock price outcomes
. The correlation between the two stock prices using the risk neutral measure
Posted Date: