4. Consider an exchange option. Suppose the initial prices (time 0) of the two s - S2 = 100 and a, = 0.40, Suppose also that the returns on the stocks are unc ssume no dividends and final maturity of the option is T = 2 year. %3D (a) Using the closed-form expressions for the price of these options, identify th e exchange option when = 0, z =0.20, a2 =0.40, and ø2 =0.60. (b) Is there a trend in the price? Intuitively, why is this the case?
4. Consider an exchange option. Suppose the initial prices (time 0) of the two s - S2 = 100 and a, = 0.40, Suppose also that the returns on the stocks are unc ssume no dividends and final maturity of the option is T = 2 year. %3D (a) Using the closed-form expressions for the price of these options, identify th e exchange option when = 0, z =0.20, a2 =0.40, and ø2 =0.60. (b) Is there a trend in the price? Intuitively, why is this the case?
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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Transcribed Image Text:4. Consider an exchange option. Suppose the initial prices (time 0) of the two stocks are
S =S2 = 100 and a =0.40,. Suppose also that the returns on the stocks are uncorrelated.
Assume no dividends and final maturity of the option is T = 2 year:
(a) Using the closed-form expressions for the price of these options, identify the price of
the exchange option when o = 0, a2 =0.20, ag =0.40, and @2 =0.60.
(b) Is there a trend in the price? Intuitively, why is this the case?
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