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 ). (c) Assume that you have purchased the call option at time 0 at the Black-Scholes price of $9.06 and you also sell at time 0 a call option written on the stock that expires in one year with a strike price of K=120 at the Black-Scholes price of $6.17. What is the probability that you lose money on this trade (i.e. your P\&L is less than 0)

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