Question
A non-dividend-paying stock has a current price of S0 = 400p. Over each of the next three years its price could increase by 20% (so
A non-dividend-paying stock has a current price of S0 = 400p. Over each of the next three years its price could increase by 20% (so St+1 = 1.2St), or decrease by 20% (so St+1 = St/1.2). The continuously compounded risk-free rate is 6% p.a. The stock price move in each year is independent of the move in other years.
A non-standard derivative pays off S3 after 3 years, provided that at some point over three years the stock price has moved up in one year and then immediately down in the following year. Otherwise, the derivative pays zero.
Calculate the current price of this non-standard derivative.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started