State the general risk-neutral pricing formula for the price of a derivative at time t in terms
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Question:
Assume that the price of a share, which pays a constant force of dividend yield q , follows geometric Brownian motion.
- (a) Derive the formula for the price at time t of Derivative 1, which pays one at time T provided the share price at that time is less than K .
- (b) Derive the formula for the price at time t of Derivative 2, which pays the share price at time T provided the share price at that time is less than K .
- (c) Hence derive the formula for the price of a European put option with strike price K.
Related Book For
Fixed Income Securities Valuation Risk and Risk Management
ISBN: 978-0470109106
1st edition
Authors: Pietro Veronesi
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