Your company has just written a one-year European put option on an equity index fund. The equity
Question:
Your company has just written a one-year European put
option on an equity index fund.
The equity index fund is currently trading at 1000. It pays dividends continuously at a
rate proportional to its price; the dividend yield is 2%. It has a volatility of 20%.
The strike price of the put option is set in order to insure against a reduction of more
than 40% in the value of the equity index fund at the end of one year.
The continuously compounded risk-free interest rate is 2.5%.
Using the Black-Scholes model, determine the price of the put option.
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