1. What is the option payoff if the stock price goes up? 2. What is the risk-neutral probability of an up movement? 3.What is the value of the option?
1. What is the option payoff if the stock price goes up? 2. What is the risk-neutral probability of an up movement? 3.What is the value of the option?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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The current price of a non-dividend-paying stock is$57.14and you expect the stock price to either go up by a factor of 1.152 or down by a factor of 0.868 over the next 0.5 years. A European call option on the stock has a strike price of$57and expires in 0.5 years. The risk-free rate is6%(annual, continuously compounded).
1. What is the option payoff if the stock price goes up?
2. What is the risk-neutral probability of an up movement?
3.What is the value of the option?
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