Morgan Stanley stock is currently traded at $101.00 per share on the market. It is expected to
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Question:
Morgan Stanley stock is currently traded at $101.00 per share on the market. It is expected to either grow to $114.00 or fall to $88.00 in the next three months. The risk-free interest rate is 3.25% pa. You are asked to value the following two European options written on the Morgan Stanley stock maturing in 3 months:
- A call option with a strike price of $103.00
- A put option with a strike price of $99.00
a) What should be the price of the call option?
b) What should be the price of the put option?
c) Discuss the risk-neutral valuation principle in option pricing. Explain why this valuation principle can be and is applied while both the stock and the option are risky securities?
Related Book For
Intermediate Accounting
ISBN: 978-0324300987
10th Edition
Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones
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