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Assume that a stock price is currently at $40. It is known that in one year stock price will be either $60 or $20. The
Assume that a stock price is currently at $40. It is known that in one year stock price will be either $60 or $20. The annual interest rate is 5% with continuous compounding. 1) What is the up-state price (i.e., the price of the Arrow security that pays $1 in the up state and $0 in the down state at the end of the year)? 2) What is the down-state price (i.e., the price of the Arrow security that pays $0 in the up state and $1 in the down state at the end of the year)? 3) What is the fair price of a European call option with strike price equal to $40 and 1 year to maturity? 4) What is the fair price of a European put option with strike price equal to $40 and 1 year to maturity
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