A stock is worth $50 on december, 1st 2021. This price increases by 4% ou decreases by 4% every 2 months. The flat continuous rate of interest is 5% and the continuous rate of dividend is 2%. a) What is the premium of an American call on this stock with a maturity of 6 months and a strike price of $48? b) What is the premium of a European put on the stock? Maturity and strike price remain unchanged. c) In option pricing theory, what does 'risk neutral' probability mean? What is the probability the European put gets exercised?

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
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A stock is worth $50 on december, 1st 2021. This price increases
by 4% ou decreases by 4% every 2 months. The flat continuous
rate of interest is 5% and the continuous rate of dividend is 2%.
a) What is the premium of an American call on this stock with a
maturity of 6 months and a strike price of $48?
b) What is the premium of a European put on the stock?
Maturity and strike price remain unchanged.
c) In option pricing theory, what does 'risk neutral' probability
mean? What is the probability the European put gets exercised?
Transcribed Image Text:A stock is worth $50 on december, 1st 2021. This price increases by 4% ou decreases by 4% every 2 months. The flat continuous rate of interest is 5% and the continuous rate of dividend is 2%. a) What is the premium of an American call on this stock with a maturity of 6 months and a strike price of $48? b) What is the premium of a European put on the stock? Maturity and strike price remain unchanged. c) In option pricing theory, what does 'risk neutral' probability mean? What is the probability the European put gets exercised?
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