Question: A stock price is currently $50. Its expected return and volatility are 12% and 30% p.a., respectively. What is the probability (under the Black-Scholes-Merton model

A stock price is currently $50. Its expected return and volatility are 12% and 30% p.a., respectively. What is the probability (under the Black-Scholes-Merton model assumption (1)) that the stock price will be greater than $80 in 2 years? Hint: Express this probability in terms of the cumulative distribution function (x) of the standard normal distribution, i.e., (x)=P[Zx] for ZN(0,1). In the famous Black-Scholes-Merton model (1973) the price of a stock (St)t0 at time t0 with initial spot price S0 (today at time t=0 ) is modeled by St=S0e(22)t+Bt

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Check my w Valley Company's adjusted trial balance on August 31, its fiscal year-end, follows. It categorizes the following accounts as selling expenses: sales salaries expense, rent expense-selling...

A stock price is currently 50. Its expected return and volatility are 12% and 30%, respectively. Assume that its year-end price follows a lognormal distribution (i.e., ln(ST /50) follows a normal...

A stock price is currently 50. Its expected return and volatility are 12% and 30%, respectively. What is the probability that the stock price will be greater than 80 in 2 years?

A stock price is currently 50. Its expected return and volatility are 12% and 30%, respectively. What is the probability that the stock price will be greater than 80 in two years? S, > 80 when In S,...

A stock price is currently 50. Its expected return and volatility are 12% and 30%, respectively. What is the probability that the stock price will be greater than 80 in 2 years? (Hint: ST > 80 when...

A stock price is currently 50. Its expected return and volatility are 12% and 30%, respectively. What is the probability that the stock price will be greater than 80 in 2 years? (H: S>80 when In Sp>...

A stock price is currently 5 0 . Its expected return and volatility are 1 2 % and 3 0 % , respectively. What is the probability that the stock price will be greater than 8 0 in 2 years? ( Hint: ST >...

Problem 3. A stock price is currently 50. Its expected return and volatility are 12% and 30%, respectively. What is the probability that the stock price will be greater than 80 in two years? (Hint S,...

A stock price is currently 50 . Its expected return and volatility are 12% and 30%, respectively. What is the probability that the stock price will be greater than 80 in two years? Hint: ST>80 when...

A stock price is currently 50. Its expected return and volatility are 12% and 30%, respectively. What is the probability that the stock price will be greater than 70 in two years?

Liam Company signed a lease for an office building for a period of 12 years. Under the lease agreement, a security deposit of $9,600 is made. The deposit will be returned at the expiration of the...

For some painkillers, the size of the dose depends on the weight of the patient. If we set x to denote the weight of patients, in pounds, and y to denote the size of a specific painkiller, in...

What is a type of risk that is unique to a company? A risk that one company must face but all other companies are not facing. Risk does not exist Specific Risk Systematic Risk Unsystematic Risk

A circular rigid body with radius r = 2 m is rolling without slipping on a curved surface with radius of curvature in 2D, as shown (not drawn to scale). The angular velocity of the body is 2 r a d /...

The given vector functions are solutions to the system x'(t) = Ax(t). 4t e sin (7t) cos (7t) X, = 4 4t X2 cos (7t) X3 sin (7t) 4t e sin (7t) cos (7t) Determine whether the vector functions form a...

The given vector functions are solutions to the system x'(t) = Ax(t). 8. X1 = 3t 9t X2 = - 8 Determine whether the vector functions form a fundamental solution set. Select the correct choice below...

Write the given system as a set of scalar equations. Let x' = col (x1'(t), X2'(t), X3'(t)- 0 1 0 9 x' = 0 0 1 x+ t -118 6. X1 (t) = X2'(t) = X3'(t) =

Write the given system in the matrix form x' = Ax +f. dx =t'x-y-z+t dt dy ='z-8 dt dz = tx-y- 2z - e dt Express the given system in matrix form.

asssess the ethical considerations that researchers in Economics, Business, and Technology should take into account when conducting cross - disciplinary research on strategic management factors and...

plan how to achieve impact in practice from your research;

take courage and go public with your work in order to share your learning;

communicate your research to non-academic audiences in an impactful and credible way.