4. Assume the BSM assumptions hold. A non-dividend-paying stock has a spot price of 10, an...

 

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4. Assume the BSM assumptions hold. A non-dividend-paying stock has a spot price of 10, an expected return of 5% per year and a return volatility of 20% per year. The continuously- compounded risk-free interest rate is 3% per year. Calculate the current price of a European-style derivative which pays S(T) where T is 6 months from now. Note that if x ~ N(, ) then y = e ~ In N(, o) and E(y") = e^+0.5n 4. Assume the BSM assumptions hold. A non-dividend-paying stock has a spot price of 10, an expected return of 5% per year and a return volatility of 20% per year. The continuously- compounded risk-free interest rate is 3% per year. Calculate the current price of a European-style derivative which pays S(T) where T is 6 months from now. Note that if x ~ N(, ) then y = e ~ In N(, o) and E(y") = e^+0.5n

Answer rating: 100% (QA)

SOLUTION To solve this problem we can use the BlackScholesMerton BSM model to calculate the current ... View the full answer