Assume that the prices for a stock follow a lognormal distribution. Let Pc be equal to the probability that a T-year, K-strike European call will be exercised and let P, be equal to the probability that a T- year, K-strike European put will be exercised. You are given that Pe - Pp = 0.4830. You are also given that PE[S; | S{ > K] = 259.08 and PE[S{ | SŁ < K] = 29.46. Find K. [DM_05c_04] O 149 O 159 O 154 O 169 O 164
Continuous Probability Distributions
Probability distributions are of two types, which are continuous probability distributions and discrete probability distributions. A continuous probability distribution contains an infinite number of values. For example, if time is infinite: you could count from 0 to a trillion seconds, billion seconds, so on indefinitely. A discrete probability distribution consists of only a countable set of possible values.
Normal Distribution
Suppose we had to design a bathroom weighing scale, how would we decide what should be the range of the weighing machine? Would we take the highest recorded human weight in history and use that as the upper limit for our weighing scale? This may not be a great idea as the sensitivity of the scale would get reduced if the range is too large. At the same time, if we keep the upper limit too low, it may not be usable for a large percentage of the population!
![Question 4
Assume that the prices for a stock follow a lognormal distribution. Let Pe be equal to the probability
that a T-year, K-strike European call will be exercised and let P, be equal to the probability that a T-
year, K-strike European put will be exercised. You are given that Pc - P, = 0.4830. You are also given
that PE[S; | St > K] = 259.08 and PE[St | S < K] = 29.46. Find K. (DM_05c_04]
149
O 159
O 154
O 169
O 164](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa726b785-e64f-4dd2-817a-bb2f3946936c%2Fae2fdf60-3b72-4e41-bfc6-d7fb313fdd68%2Fz6mn08a_processed.jpeg&w=3840&q=75)
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