Question: Problem 1. Suppose you are interested in a lognormally distributed stock currently priced at $100 with a 10% continuously compounded expected rate of return (i.e.

Problem 1. Suppose you are interested in a lognormally distributed stock

Problem 1. Suppose you are interested in a lognormally distributed stock currently priced at $100 with a 10% continuously compounded expected rate of return (i.e. =0.10 ), 2% dividend yield (i.e. =0.02 ), and 30% volatility (i.e. =0.30 ). The continuously compounded interest rate is 5% (i.e. r=0.05 ). (b) Assume that you have purchased the call option at time 0 at the Black-Scholes price of $9.06. What is the probability that your profit at option expiration is greater than $4.00

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