Problem 5. Assume you live in a risk-neutral world. A stock has a spot price of 10 and pays a

one-time special dividend of 1 in 6 months. The annual eective interest rate is 5% per year.

[a] Calculate the prepaid forward price of the stock today

[b] Suppose the stock price in one year can take on one of the three possibilities 12, 10, 8 with

probabilities p1; p2; p3 respectively. You also observe that a 1-year European-style 10-strike call

option on the stock is worth 0.5 today.

Calculate the price of a 1-year European-style put option on the stock, with a strike price of 11.

Problem| 5. Assume you live in a risk-neutral world. A stock has a spot price of 10 and pays a one-time special dividend of 1 in 6 months. The annual effective interest rate is 5% per year. [a] Calculate the prepaid forward price of the stock today [6] Suppose the stock price in one year can take on one of the three possibilities 12, 10, 8 with probabilities P1, P2, P3 respectively. You also observe that a 1-year European-style 10-strike call option on the stock is worth 0.5 today. Calculate the price of a 1-year European-style put option on the stock, with a strike price of 11. Problem| 5. Assume you live in a risk-neutral world. A stock has a spot price of 10 and pays a one-time special dividend of 1 in 6 months. The annual effective interest rate is 5% per year. [a] Calculate the prepaid forward price of the stock today [6] Suppose the stock price in one year can take on one of the three possibilities 12, 10, 8 with probabilities P1, P2, P3 respectively. You also observe that a 1-year European-style 10-strike call option on the stock is worth 0.5 today. Calculate the price of a 1-year European-style put option on the stock, with a strike price of 11