FM5002-HW12-5.2.12

5 that the an n ualized volatility is 40 use the 70 30

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: the stock at the en d of the 100 days. a. We compute that 0.025 Μ 0.0000171233, an d 4 365 0.35 0.0104685, so that Σ 4 365 0.7 u 0.3 d Μ 0.000034246575, and 0.7 0.3 u d Σ 0.0091599186. Solving, we con clude that u 0.00603082 an d d −0.0139578. b. Using u and d as above, we have the expression for the expected price of the stock 400 5 i0 400 i 0.7 i 0.3 400 i eu i d 400 i dollars. 0061− . Price a 30 − day European call option on a stock, usin g the Black − Scholes Option Pricin g Formula. 1 Assume that the ann ual drift is 2 . Assume that the ann ual volatility is 35 . Assume that the an nual force of in terest is 1 . That is, $1, in vested risk free, grows, after one year, to e 0.01 dollars. Assume that the curren t price is $3 per share, an d that the strike price is also $3 per share. 6 FM5002−HW12−5.2.12.nb We are given that Σ T 30 0.01, K 3, an d S0 3. Then 0.0821918, 365 T ΣΣ 0.35, r 0.0860073, r r T 0.000821918, K 3 K...
View Full Document

Ask a homework question - tutors are online