Question: Consider a forward start option which, 6 months from today, will give its owner a 1-year European call option written on a stock with a

Consider a forward start option which, 6 months from today, will give its owner a 1-year European call option written on a stock with a strike price equal to 90% of the stock price at that time. You are given:

(i) The volatility of the stock is 25%. (ii) The forward price for delivery of 1 share of the stock 6 months from today is 80.

(iii) The continuously compounded risk-free interest rate is 4%. (iv) The stock pays continuous dividend at a rate of 1%.

Determine the price today of the forward start option.

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