Assume the Black-Scholes framework. For a stock which pays dividends continuously at a rate proportional to its

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Assume the Black-Scholes framework. For a stock which pays dividends continuously at a rate proportional to its price, you are given:

(i) The continuously compounded expected rate of stock-price appreciation is 7%.

(ii) The continuously compounded risk-free interest rate is 2%.

(iii) The 95% lognormal prediction interval for the 2-year stock price is (45.7693, 241.4658).

Calculate the probability that the payoff of a 3-year 96-strike 103-trigger European gap put option is negative.

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Derivative Pricing

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Authors: Ambrose Lo

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Question Posted: Dec 07, 2023 06:08 AM

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Assume the Black-Scholes framework. For a stock which pays dividends continuously at a rate proportional to its

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To calculate the probability that the payoff of a 3year 96strike 103 trigger European gap put option is negative we can use the Black Scholes framewor...View the full answer

Derivative Pricing

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