A stock is currently priced at $20. We model the possible movement of stock price over the
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Question:
A stock is currently priced at $20. We model the possible movement of stock price over the next 3 months using a one-step Binomial tree. This means that u = 1.1618 and d = 0.8607. The riskfree rate of interest is 8% pa continuously compounded.
Let ST denote the stock price 3 months from now. Define a new derivative security which has a payoff equal to. That is, if you buy this derivative security today, in 3 months' time, you will receive a cash payment equal to whatever the finishing share price is, to the power of three.
What is the fair price to pay for this derivative security in the market today?
Related Book For
Management Science The Art of Modeling with Spreadsheets
ISBN: 978-1118582695
4th edition
Authors: Stephen G. Powell, Kenneth R. Baker
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