Question
A stock price is currently $30. It is expected to increase to $35 or reduce to $28 in the next month. The risk-free interest
A stock price is currently $30. It is expected to increase to $35 or reduce to $28 in the next month. The risk-free interest rate is 10% per annum with continuous compounding. What is the risk-neutral probability for the stock to be $35 in a month? Calculate the value of a European call option with strike price of $30 and one-month maturity on this stock. Suppose the risk premium of the stock is 5% per annum with continuous compounding. What is the actual probability for the stock to be $35 in a month? What is the expected return (annualized and continuously compounded) of the option? (16pts)
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Solution The riskneutral probability is the probability of a future outcome that has been adjusted f...
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Income Tax Fundamentals 2013
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
31st Edition
1111972516, 978-1285586618, 1285586611, 978-1285613109, 978-1111972516
