Question: Suppose S = $40, K = $40, = 0.30, r = 0.08, and = 0. a. What is the price of a standard

Suppose S = $40, K = $40, σ = 0.30, r = 0.08, and δ = 0.

a. What is the price of a standard European call with 2 years to expiration?

b. Suppose you have a compound call giving you the right to pay $2 1 year from today to buy the option in part (a). For what stock prices in 1 year will you exercise this option?

c. What is the price of this compound call?

d. What is the price of a compound option giving you the right to sell the option in part (a) in 1 year for $2?

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a 961 b In one year the option will be worth more than 2 if S 1 31723 ... View full answer

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