Assume the BlackScholes framework. Let S(t) denote the price at time t of a nondividend-paying stock. Consider

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Assume the BlackScholes framework. Let S(t) denote the price at time t of a nondividend-paying stock.

Consider a European gap option which matures in one year. If the one-year stock price is greater than $100, the payoff is S(1) – 90;

Otherwise, the payoff is zero. You are given:

(i) S(0) = $80.

(ii) The stock’s volatility is 30%.

(iii) The continuously compounded risk-free interest rate is 8%.

Calculate the price of the gap option.

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Derivative Pricing

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Authors: Ambrose Lo

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Question Posted: Nov 24, 2023 10:31 PM

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Assume the BlackScholes framework. Let S(t) denote the price at time t of a nondividend-paying stock. Consider

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The gap option is a 90strike 100trigger 1year Eur...View the full answer

Derivative Pricing

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