Assume the Black-Scholes framework. For t 0, let S(t) be the time-t price of a nondividend-paying
Question:
Assume the Black-Scholes framework. For t ≥ 0, let S(t) be the time-t price of a nondividend-paying stock. You are given:
(i) S(0) = 180.
(ii) The stock’s volatility is 20%.
(iii) The continuously compounded expected rate of return on the stock is 8%.
(iv) The continuously compounded risk-free interest rate is 5%.
Consider a 1-year European partial cash-or-nothing option on the stock. The option’s payoff is
Calculate the time-0 price of this option.
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By riskneutral pricing the 6month price of the special 1year derivative ...View the full answer
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