4. Consider an exchange option. Suppose the initial prices (time 0) of the two stocks are...

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4. Consider an exchange option. Suppose the initial prices (time 0) of the two stocks are S₁ =S₂ =100 and g₁ = 0.40. Suppose also that the returns on the stocks are uncorrelated. Assume no dividends and final maturity of the option is T = 2 year. (a) Using the closed-form expressions for the price of these options, identify the price of the exchange option when ₂ = 0,02 = 0.20, 02 = 0.40, and 02 = 0.60. (b) Is there a trend in the price? Intuitively, why is this the case? 4. Consider an exchange option. Suppose the initial prices (time 0) of the two stocks are S₁ =S₂ =100 and g₁ = 0.40. Suppose also that the returns on the stocks are uncorrelated. Assume no dividends and final maturity of the option is T = 2 year. (a) Using the closed-form expressions for the price of these options, identify the price of the exchange option when ₂ = 0,02 = 0.20, 02 = 0.40, and 02 = 0.60. (b) Is there a trend in the price? Intuitively, why is this the case?

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Exchange Option Pricing and Analysis a Exchange Option Price An exchange option gives the holder the ... View the full answer