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Consider a 3-month put option. Suppose that the underlying stock price is $16, the strike $15.5, the interest rate is 10% p.a., stock volatility is
Consider a 3-month put option. Suppose that the underlying stock price is $16, the strike $15.5, the interest rate is 10% p.a., stock volatility is 5% per month.
a)What is the level of annual volatility?
b)Define implied volatility. Explain how you would compute implied volatility (no need to compute).
c)Assume that:
dt = 0.0833
u = 1.0513
a = 1.0084
p = 0.5711
What is the probability of stock price going down?
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