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FINM2002 Total 6 Marks stock's price is currently $20. Over each of the next two 4-month periods, it is expected to go up by 5%
FINM2002 Total 6 Marks stock's price is currently $20. Over each of the next two 4-month periods, it is expected to go up by 5% or down by 2%, and the risk free rate is 5% per annum, continuously compounded. There is an 8-month European call option with a strike price of $21. Please complete all of the following subparts. (Note: keep all the decimal places during the calculation.) What is the risk neutral probability of the stock's price going down? (2 marks) What is the value of the option at the end if the price kept decreasing until the date of expiry? (2 marks) iii) What is the value of the option in 4 months from now, if the stock price moved up during this period? (2 marks)
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