A stock price index pays a continuous dividend at annual rate = 0.02 and the stock

A stock price index pays a continuous dividend at annual rate δ = 0.02 and the stock price index follows the lognormal model with ln St/S0  ∼ N µt, σ2 t  where S0 = 25, µ = 0.07 and σ = 0.29. The risk-free rate of interest is r = 0.045. You have purchased a European put option on the stock index with strike price K = 24 that expires at time 1. You are to perform a Monte Carlo simulation to price this European put option. You are given the following table of standard normal random draws.

 Draw Number

 Standard Normal Draw 

1    −1.50

2   −0.80

3   −0.75

4   1.05 

5  −2.18 

6   0.47 

7   1.65

 8   −1.65 

(1) Based on this sequence of standard normal random draws, what is the Monte Carlo estimate for the price this European put option at time 1? (2) What is the standard deviation of the Monte Carlo estimat

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To perform a Monte Carlo simulation to price a European put option we need to simulate the future st... View the full answer