Consider European options in a GBM economy, whose payoffs at time T are In(ST) and (In[ST/K])+....

Transcribed Image Text:

Consider European options in a GBM economy, whose payoffs at time T are In(ST) and (In[ST/K])+. You may use the formula fedz = √e v². √2π [10] Use risk-neutral valuation to find formulas for the prices of these options at time 0. [5] Find the numerical value of these prices when μ = 8%, o = 20%, r = 2%, K = 90, T = 2 years, and the initial stock price is So = $100. Consider European options in a GBM economy, whose payoffs at time T are In(ST) and (In[ST/K])+. You may use the formula fedz = √e v². √2π [10] Use risk-neutral valuation to find formulas for the prices of these options at time 0. [5] Find the numerical value of these prices when μ = 8%, o = 20%, r = 2%, K = 90, T = 2 years, and the initial stock price is So = $100.

Answer rating: 100% (QA)

Solution 1 The payoff of the first option is lnST ... View the full answer