You use the following information to construct a binomial forward tree for modeling the price movements of
Question:
You use the following information to construct a binomial forward tree for modeling the price movements of a nondividend-paying stock:
(i) The length of each period is 4 months.
(ii) The current stock price is 123.
(iii) The stock’s volatility is 30%.
(iv) The continuously compounded risk-free interest rate is 8%.
(v) The continuously compounded expected return on the stock is 12%.
Calculate the continuously compounded expected rate of return on a 120-strike 1-year European call option over its 1-year life.
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To calculate the continuously compounded expected rate of return on a 1year European call option with a 120strike we will use the binomial forward tre...View the full answer
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