The price of a stock S could either double or halve in one year's time, and...
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The price of a stock S could either double or halve in one year's time, and no other outcome is possible. The continuously compounded risk-free interest, r, is 10% and the current price of the stock, So, is $10. A derivative is written on the stock with a payoff in one year as [(S) - S]/100, where S is the actual price of stock S in one year. Let's assume that there are no transaction costs associated with trading either the stock or the derivative, whether for long or short positions. What is the arbitrage-free price of the derivative today? Enter your answer to 2 decimal places eg if your answer is 0.457 enter as 0.46. If your answer is 0.4 enter as 0.40 The price of a stock S could either double or halve in one year's time, and no other outcome is possible. The continuously compounded risk-free interest, r, is 10% and the current price of the stock, So, is $10. A derivative is written on the stock with a payoff in one year as [(S) - S]/100, where S is the actual price of stock S in one year. Let's assume that there are no transaction costs associated with trading either the stock or the derivative, whether for long or short positions. What is the arbitrage-free price of the derivative today? Enter your answer to 2 decimal places eg if your answer is 0.457 enter as 0.46. If your answer is 0.4 enter as 0.40
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