Question
Assume a non-dividend-paying stock selling at $100 will either go up at the rate of u or go down at the rate of d each
Assume a non-dividend-paying stock selling at $100 will either go up at the rate of u or go down at the rate of d each month for the next 2 months. From historical data on the stocks (annual) returns, you know that the mean is 15% and the volatility is 45%. The price movement parameters u and d are estimated such that they match with the stock return volatility. The risk-free rate is 9% per annum with continuous compounding.
a) What is the price of a European call option with a strike price of $95?
b) What is the price of a European put option with a strike price of $95?
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