A price of a nondividend-paying stock is currently $40. It is known that at the end of

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A price of a nondividend-paying stock is currently $40.

It is known that at the end of one month the stock’s price will be either $42 or $38.

The risk-free interest rate is 8% per annum with continuous compounding.

(a) Determine the value of a one-month European call option with a strike price of $39.

(b) Assume that the expected return on the stock is 10% as opposed to the risk-free rate.

What is the correct discount rate to be applied to the payoff in the real world?

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Derivative Pricing

ISBN: 9780367734213

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Authors: Ambrose Lo

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Question Posted: Nov 22, 2023 08:11 AM

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A price of a nondividend-paying stock is currently $40. It is known that at the end of

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a With u 4240 105 and d 3840 095 the ri...View the full answer

Derivative Pricing

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