In this problem we assume the stock price S(t) follows Geometric Brownian Motion described by the following stochastic differential equation: dS = µSdt+oSdw, where dw is the standard Wiener process and µ = 0.13 and o= 0.20 are constants. The current stock price is $100 and the stock pays no dividends. Consider an at-the-money European call option on this stock with 1 year to expiration. What is the most likely value of the option at expiration? Please round your numerical answer to 2 decimal places.

In this problem we assume the stock price S(t) follows Geometric Brownian Motion described by the following stochastic differential equation: dS = µSdt+oSdw, where dw is the standard Wiener process and µ = 0.13 and o= 0.20 are constants. The current stock price is $100 and the stock pays no dividends. Consider an at-the-money European call option on this stock with 1 year to expiration. What is the most likely value of the option at expiration? Please round your numerical answer to 2 decimal places.

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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Question

In this problem we assume the stock price S(t) follows Geometric Brownian Motion
described by the following stochastic differential equation:
dS = µSdt + o Sdw,
where dw is the standard Wiener process and u = 0.13 and o =
current stock price is $100 and the stock pays no dividends.
0.20 are constants. The
Consider an at-the-money European call option on this stock with 1 year to expiration.
What is the most likely value of the option at expiration?
Please round your numerical answer to 2 decimal places.

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