The current price of stock ABC is 40. Stock ABC pays dividends continuously at a rate proportional

Question:

The current price of stock ABC is 40. Stock ABC pays dividends continuously at a rate proportional to its price. The dividend yield is 2%.

You are given the following premiums of one-year European call options on stock ABC for various strike prices:

Strike 35 40 45 Call premium 7.24 4.16 2.62

The effective annual risk-free interest rate is 8%.

Let S(1) be the price of the stock one year from now.

Determine the range for S(1) such that a 35-strike short put produces a higher profit than a 45-strike short put, but a lower profit than a 40-strike short put.

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Derivative Pricing

ISBN: 9780367734213

1st Edition

Authors: Ambrose Lo

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Question Posted: Nov 22, 2023 08:11 AM

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The current price of stock ABC is 40. Stock ABC pays dividends continuously at a rate proportional

Question:

Strike 35 40 45 Call premium 7.24 4.16 2.62

Step by Step Answer:

Lets first calculate the implied volatilities of the call options using the BlackScholes model For each strike price we can set up the BlackScholes eq...View the full answer

Derivative Pricing

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