A knockout call option loses all value at the instant the price of the stock drops below
Question:
A knockout call option loses all value at the instant the price of the stock drops below a given “knockout level.” Determine a fair price for a knockout call option when the current stock price is $20, the exercise price is $21, the knockout price is $19.50, the mean annual growth rate of the stock is 12%, the annual volatility is 40%, the risk free rate is 10%, and the exercise date is one month from now (where you can assume there are 21 trading days in the month and 250 in a year).
Step by Step Answer:
The fair price for a knockout call option when the current stock price is 20 the exercise price is 2...View the full answer
Practical Management Science
ISBN: 978-1305250901
5th edition
Authors: Wayne L. Winston, Christian Albright
Related Video
A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
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