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A power option pays off [max(S₁ – X),0]² at time T where ST is the stock price at time T and X is the strike price. Consider the situation where X = 26 and T is one year. The stock price is currently $24 and at the end of one year it will either $30 or $18. The risk-free interest rate is 5% per annum, compounded continuously. What is the risk- neutral probability of the stock rising to $30?

A power option pays off [max(S₁ – X),0]² at time T where ST is the stock price at time T and X is the strike price. Consider the situation where X = 26 and T is one year. The stock price is currently $24 and at the end of one year it will either $30 or $18. The risk-free interest rate is 5% per annum, compounded continuously. What is the risk- neutral probability of the stock rising to $30?

Essentials Of Investments
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
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A power option pays off [max(S₁ - X),01² at time T where ST is the stock price at time T and X is the strike price. Consider the situation where X = 26 and T is one year. The stock price is currently $24 and at the end of one year it will either $30 or $18. The risk-free interest rate is 5% per annum, compounded continuously. What is the risk- neutral probability of the stock rising to $30? 0.500 0.603 0.450 None of the above
Transcribed Image Text:A power option pays off [max(S₁ - X),01² at time T where ST is the stock price at time T and X is the strike price. Consider the situation where X = 26 and T is one year. The stock price is currently $24 and at the end of one year it will either $30 or $18. The risk-free interest rate is 5% per annum, compounded continuously. What is the risk- neutral probability of the stock rising to $30? 0.500 0.603 0.450 None of the above
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