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The current price of Kylie Jenner Corporation stock is SEK100. Over the next year, this stock price will either go up or down by 25%.
The current price of Kylie Jenner Corporation stock is SEK100. Over the next year, this stock price will either go up or down by 25%. The probability of moving up is 29%. The stock pays no dividends. The interest rate is 5% (quoted as an EAR).
- 1)What is the payoff of the stock in the up state and down state?
- 2)A banker designs an exotic option labeled "Volatility-Boost" that pays off| 90|at maturity of 1 year. Here, S refers to the stock price at maturity and the notation ||refers to the absolute value, e.g., |-3|=|3|=3. What is the payoff of the option in
- the up state and down state?
- 3)Derive how to replicate the payoff of the "Volatility-Boost" option using a portfolio
- consisting of a bond and a stock?
- 4)What is the option's delta? Interpret its meaning.
- 5)What is the option price at time 0?
- 6)Can you construct the "Volatility-Boost" option as a portfolio of two standard options?
- If so which options would you need to purchase or sell?
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