Assume the Black-Scholes framework. Consider a 3-year European contingent claim on a stock. For t ≥ 0, let S(t) be the time-t price of the stock.

You are given:

(i) S(0) = 45.

(ii) The stock’s volatility is 20%.

(iii) The stock pays dividends continuously at a rate proportional to its price. The dividend yield is 3%.

(iv) The continuously compounded risk-free interest rate is 6%.

(v) The 3-year payoff of the contingent claim i

Calculate the current price of the contingent claim.

Transcribed Image Text:

Payoff = max(S (3) -45)+, 2(S(3) — 60)}.