Question: *Please show work so I can get a better understanding* A binary option pays off $500 if a stock price is greater than $60 in

*Please show work so I can get a better understanding*

A binary option pays off $500 if a stock price is greater than $60 in three months. The current stock price is $61 and its volatility is 20%. The risk-free rate is 2% and the expected return on the stock is 8%. What is the value of the option? What is the real-world expected payoff?

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!

Q:

A binary option pays off $500 if a stock price is greater than $60 in three months. The current stock price is $61 and its volatility is 20%. The risk-free rate is 2% and the expected return on the...

Q:

A binary option pays off $500 if a stock price is greater than $60 in three months. The current stock price is $61 and its volatility is 20%. The risk-free rate is 2% and the expected return on the...

Q:

10.12 A binary option pays off $500 if a stock price is greater than $60 in three months. The current stock price is $61 and its volatility is 20%. The risk-free rate is 2% and the expected return on...

Q:

A binary option pays off $500 if a stock price is greater than $60 in three months. The current stock price is $61 and its volatility is 20%. The risk-free rate is 2% and the expected return on the...

Q:

A binary option pays off $500 if a stock price is greater than $60 in three months. The current stock price is $61 and its volatility is 20%. The risk-free rate is 2% and the expected return on the...

Q:

Questions I need help answering (Please show work) A. What is the Cost of Equity? B. Required Rate of Return? C. Preferred stock vs Bonds D. Assume a 40% tax rate E. What is the beta estimate,...

Q:

A binary option pays off $500 if a stock price is larger than $60 in three months. The current stock price is $61 and the volatility of returns is 20% per year. The risk-free rate is2% and the...

Q:

please show work 2. ( 10pts ) You think that the price of a stock is likely to increase from $50 to $60 over the next 3 months. So, you buy seven American-style call option contracts on the stock at...

Q:

Requirements for PART I Do you see any potential areas of risk that the partners in the Briarwood City office should consider regarding RCC? In your response, consider business risk to JKN, en-...

Q:

Requirements for PART I Do you see any potential areas of risk that the partners in the Briarwood City office should consider regarding RCC? In your response, consider business risk to JKN, en-...

Q:

Identify the null and alternative hypotheses for this test. Choose the correct answer below. A. Ho: p=0.1 H: p

Q:

Thiols such as ethanethiol and propanethiol can be used to reduce vitamin K epoxide back to vitamin KH2, but they react much more slowly than dihydrolipoate. Explain.

Q:

How could you use borrowing and lending to completely hedge this transaction? Please list all transactions you would make. ( 3 0 points ) e . Would the hedge discussed in Part C be a better or worse...

Q:

When an argument is passed to a method: Group of answer choices the method must not assign another value to the parameter that receives the argument values may not be passed to methods its value is...