Question
A stock price S0is currently $25. It is known that at the end of two months it will be either $23 or $27. The risk-free
A stock price S0is currently $25. It is known that at the end of two months it will be either $23 or $27. The risk-free interest rate is 10% per annum with continuous compounding. Suppose STis the stock price at the end of two months. What is the value of a derivative that pays off max(ST(ST-S0),0)at this time? (Hint: risk neutral valuation formula is a general formula, not just for pricing options.)
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Introduction to Finance Markets, Investments and Financial Management
Authors: Ronald W. Melicher, Edgar A. Norton
16th edition
1119398282, 978-1-119-3211, 1119321115, 978-1119398288
