1. Consider the following information for XYZCorp stock, which is non-dividend-paying. The interest rate is 2%. The stock moves on a binomial tree, with period length h = 0.5 years, as follows:

a) Calculate the price of a derivative which pays, in one year's time, the stock's average price over the year (so the average is taken over three prices). 

b) A customer comes to you wanting to buy a derivative whose payout is the stock's price at the end of the year minus its average price over the year. What is its (midmarket) price? (You shouldn't need to do too many calculations here.) 

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Answer rating: 100% (QA)

a To calculate the price of a derivative paying the average price of the stock over the year we ... View the full answer