Question
The price of a non-dividend-paying asset is currently $400 and the risk-free interest rate is 6% per annum with continuous compounding. The volatility is 25%
The price of a non-dividend-paying asset is currently $400 and the risk-free interest rate
is 6% per annum with continuous compounding. The volatility is 25% per annum. A
European option on the underlying asset has the remaining time to maturity equal to
two years.
REQUIRED
1. Using the continuous-time formula of Black-Scholes and Merton compute the value
of a European call option with a strike price equal to $300.
2.
Explain briey in words (up to approximately 10 lines of text) the necessary steps
of the computation and comment on how to achieve good numerical accuracy of
the nal result
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