A stock price is currently $50 It is known that at the end of six months it will be either $60 or $42 The risk free rate of interest with continuous compounding is 12 per annum Calculate the value of a six month European call option on the stock with an exercise price of $48 Verify that no arbitrag...

At the end of six months the value of the option will be either 12 if the stock pric ...

A stock price is currently $50. It is known that at the end of six months it

Question:

A stock price is currently $50. It is known that at the end of six months it will be either $60 or $42. The risk-free rate of interest with continuous is 12% per annum. Calculate the value of a six-month European call option on the stock with an exercise price of $48. Verify that no-arbitrage arguments and risk-neutral valuation arguments give the same answers. Compounding
Compounding is the process in which an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will...