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A stock is currently priced at $25. We model the possible movement of stock price over the next 3 months using a one-step Binomial tree.
A stock is currently priced at $25. We model the possible movement of stock price over the next 3 months using a one-step Binomial tree. This means that u = 1.2214 and d = 0.8187. The riskfree rate of interest is 5% pa continuously compounded. Let S denote the stock price 3 months from now. Define a new derivative security which has a payoff equal to $1000/ST. That is, if you buy this derivative security today, in 3 months' time, you will receive a cash payment equal to $1000 divided by whatever the stock price is at the point. What is the fair price to pay for this derivative security in the market today? Enter your answer to 2 decimal places. Do not enter a dollar sign in your
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