For a nondividend-paying stock, you are given: i) The current stock price is 100 ii) At the end of one year the stock price will either be 10Ou or 92 iii) The continuously compounded risk-free interest rate is 0.05 iv) The price of a one-year at-the-money call option on the stock is 1.78 Calculate u A) 1.05 B) 1.15 C) 1.25 D) 1.35 E) No such u exists

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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Please show all work so I can learn. Thanks!
For a nondividend-paying stock, you are given:
i) The current stock price is 100
ii) At the end of one year the stock price will
either be 100u or 92
iii) The continuously compounded risk-free
interest rate is 0.05
iv) The price of a one-year at-the-money call
option on the stock is 1.78
Calculate u
A) 1.05
B) 1.15
C) 1.25
D) 1.35
E) No such u exists
Transcribed Image Text:Please show all work so I can learn. Thanks! For a nondividend-paying stock, you are given: i) The current stock price is 100 ii) At the end of one year the stock price will either be 100u or 92 iii) The continuously compounded risk-free interest rate is 0.05 iv) The price of a one-year at-the-money call option on the stock is 1.78 Calculate u A) 1.05 B) 1.15 C) 1.25 D) 1.35 E) No such u exists
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