Exercise 7.6 The price of a certain security follows a geometric Brown- ian motion with drift...
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Exercise 7.6 The price of a certain security follows a geometric Brown- ian motion with drift parameter μ = .05 and volatility parameter o = .3. The present price of the security is 95. (a) If the interest rate is 4%, find the no-arbitrage cost of a call option that expires in three months and has exercise price 100. (b) What is the probability that the call option in part (a) is worthless at the time of expiration? (c) Suppose that a new type of investment on the security is being traded. This investment returns 50 at the end of one year if the price six months after purchasing the investment is at least 105 and the price one year after purchase is at least as much as the price was after six months. Determine the no-arbitrage cost of this investment. Exercise 7.6 The price of a certain security follows a geometric Brown- ian motion with drift parameter μ = .05 and volatility parameter o = .3. The present price of the security is 95. (a) If the interest rate is 4%, find the no-arbitrage cost of a call option that expires in three months and has exercise price 100. (b) What is the probability that the call option in part (a) is worthless at the time of expiration? (c) Suppose that a new type of investment on the security is being traded. This investment returns 50 at the end of one year if the price six months after purchasing the investment is at least 105 and the price one year after purchase is at least as much as the price was after six months. Determine the no-arbitrage cost of this investment.
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Answer rating: 100% (QA)
a To find the noarbitrage cost of a call option we can use the BlackScholes formula The formula take... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-0324592375
17th Edition
Authors: James D. Stice, Earl K. Stice, Fred Skousen
Posted Date:
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