The price of a stock is currently $50. It is expected that at the end of a

Question:

The price of a stock is currently $50. It is expected that at the end of a time period, the price will be either $75 or $25. The risk-free interest over this period is zero.

(a) Prove that there is no arbitrage opportunity.

(b) Write the prices of call and put options with an exercise price of $50.

(c) Write the price of the state security that corresponds to the increase of the stock price.

(d) Solve the problems above for r = 0.1.

(e) Give an example of r for which there is an arbitrage opportunity. Point out how a sure win may be accomplished.

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For book-img-for-question

Probability And Stochastic Modeling

ISBN: 9781439872062

1st Edition

Authors: Vladimir I. Rotar

See More Books

Question Posted: Jan 11, 2024 09:01 AM

See More Questions

KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
Last Sale Net Bid Ask Open Int Puts Last Sale Net bid Ask Vol Open Int 16Aug 155.00(1619H155-E) 6.45 0.75 6.95 7.25 9 16Aug 155.00(1619T155-E) 1.18 (0.75) 1.17 1.25 61 4505 16Aug 166.00(1619H160-E)...
Design a linear-time algorithm to sort an array of Comparable objects that is known to have at most three distinct values. (Edsger Dijkstra named this the Dutch-national-flag problem because the...
Income Effects of Receivables Transactions Sandburg Company requires additional cash for its business. Sandburg has decided to use its accounts receivable to raise the additional cash and has asked...
A thin insulated wire forms a plane spiral of N = 100 tight turns carrying a current I = 8 mA. The radii of inside and outside turns (Fig. 3.67) are equal to a = 50 mm and b = 100 ram. Find: (a) The...
If the radius of a wire stretched by a load is doubled. then Young's modulus of elasticity will be (a) Doubled (b) Halved (c) Four times (d) Unaffected
The Weather channel reports that it is a hot, muggy day with an air temperature of 90F, a 10 mph breeze out of the southwest and bright sunshine with a solar insulation of 400 W/m2. Consider the wall...
Discuss the impact of surface roughness and microstructuring on convective heat transfer in microchannels. How do these surface characteristics alter flow patterns and heat transfer coefficients ?
Proceeding from a common-sense point of view, interpret the fact that the price of the European option is larger than the price of the American option.
Assume that in a market, the pricing procedure (3.1.3) corresponds to the vector = (0.2, 0.03, 0.07, 0.1, 0.2, 0.2). (a) How many states of nature can an investor face in this market? (b) Which...
The term fiber has several meanings with regard to textiles. Briefly describe bast fibers, soft fibers, hard fibers, and wood fibers. Give an example of each.
If all of the energy from the sun were captured by solar cells with efficiency levels in the middle of the range of sola cell efficiency, how much energy could be converted to useful work each year?
Identify a strength and a weakness of each of the following fuels: a) Coal b) Hydrogen c) Natural Gas d) Solar Fuel
Suppose that in order to reduce the amount of smog, the city where you live is contemplating either (1) requiring everyone to ride a moped to work, or (2) providing each family with 10 gallons of gas...
What do you see as the role for policy in bringing about the efficient treatment of natural resources and the environment? Provide a specific example of a policy you would create or abolish.
In your carefully considered opinion, what is the role of education in bringing about the efficient treatment of natural resources and the environment? Briefly describe the type of education programs...
What is the statute of limitations, and what role does it play in the filing of tax returns?
At the beginning of the year, Lam Ltd. had total assets of $800,000 and total liabilities of $500,000. Use this information to answer each of the following independent questions. (a) If Lam's total...
Read The Impact of Capacity-Building Programs on Nonprofits: A Random Assignment Evaluation. What were the results of the Impact Evaluation performed by the authors to assess capacity?
In deciding whether to recognize the tax-exempt status of a new nonprofit, should the Internal Revenue Service consider whether or not it will duplicate the services of other, existing organizations...
If you were a nonprofit CEO and were approached by another nonprofit CEO about the possibility of collaborating, what are some of the first questions you might have?
7. x+1 = 2x-3, find x.
Suppose you are constructing a portfolio of two companies. The first has 10,000 shares outstanding at a current price of $100 per share, while the second has 60,000 shares out- standing at a current...
The graph shows the function f(x). The graph shows g(x).

The price of a stock is currently $50. It is expected that at the end of a

Question:

Step by Step Answer:

a For the martingale measure 2 we have 50 75252 Together with 12 1 this gives 2 05 The measure is po...View the full answer

Probability And Stochastic Modeling

Students also viewed these Business questions