Question
Consider a chooser option (also known as an as-you-like-it option) on a non divident-paying stock. At time 1, its holder will choose whether it becomes
Consider a chooser option (also known as an as-you-like-it option) on a non divident-paying stock. At time 1, its holder will choose whether it becomes a European call option or a European put option, each of which will expire at time 3 with a strike price of $100. The chooser option price is $20 at time 0. The stock price is $100 at time t = 0. Let C(T) denote the price of a European call option at time t=0 on the stock expiring at time T>0, with a strike price of $100.
You are given: (i) The risk-free interest rate is 0. (ii) C(1) = 5.
Determine C(3)
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