The current share price of Winetowat Inc is $50. Future movements in Winetowat Inc's share price are well-described by a continuous process with no jumps and constant volatility. The volatility of the continuously compounded return on Winetowater's stock is 30% per annum.

The risk-free rate with annual compounding is 4% per annum.

(a) What is the continuously compounded risk-free rate per annum?

(b) What is the cost of acquiring a portfolio that could be dynamically managed to replicate the payoff from a three-month European-style PUT option on the stock of Winetowat with an exercise price of $48? Note, these are the payoffs to a put option, not a call.

Answer rating: 100% (QA)

a The continuously compounded riskfree rate per annum can be calculated using the formula rf ln1 Rf ... View the full answer