Question 1 (20 marks) Suppose Mr. T comes to you via a broker with the following proposition: "You will give me $1600 today. In return, 18 months from now I will guarantee to pay you whatever the square of the stock price of ABC is at the time. For example, if the stock price ends up at $80, I will pay you $80^2=$6400." The current stock price of ABC is $20. You know that each half year the stock price will either increase by 100% or decrease by 50%. The risk-free discount rate is 9.76% per annum. a) What is the annualized volatility for ABC's stock price? (2 marks) b) Assume that the stock pays no dividends. Would you accept this offer? Why? (8 marks) Question 1 (20 marks) Suppose Mr. T comes to you via a broker with the following proposition: "You will give me $1600 today. In return, 18 months from now I will guarantee to pay you whatever the square of the stock price of ABC is at the time. For example, if the stock price ends up at $80, I will pay you $80^2=$6400." The current stock price of ABC is $20. You know that each half year the stock price will either increase by 100% or decrease by 50%. The risk-free discount rate is 9.76% per annum. a) What is the annualized volatility for ABC's stock price? (2 marks) b) Assume that the stock pays no dividends. Would you accept this offer? Why? (8 marks)