Question: Question 2 A binary option pays off $150 if a stock price is greater than $40 in three months. The current stock price is $35

Question 2

A binary option pays off $150 if a stock price is greater than $40 in three months. The

current stock price is $35 and its volatility is 35%. The risk-free rate is 4% and the expected

return on the stock is 10%.

2.1 What is the value of the option?

2.2 What is the real-world probability that the payoff will be received?

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