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Unformatted text preview: one-period option written on MNO security with exercise price of
$100 when the risk free interest rate is 2%?
To evaluate the current price we ﬁrst have to ﬁnd the cashﬂows at the option exercise
date. The cash ﬂow of a call option at maturity could be found by looking at the payoﬀ
Call Option ✻
✲ Alternatively we could use the formula: In this case, the two possible values of the underlying in this case are
It is only in the case where the price of the underlying is greater than the exercise price of
the option that the option has any value. ✟
❍❍ To price we need also need the values ❍
❍ and in the formula Suppose there are traded two digital options, one that pays oﬀ $1 if NMO stock is at 105,
another that pays oﬀ $1 if NMO stock is at 95. The prices of these digital options are
. We use these prices to ﬁnd
and : 92 Pricing Derivatives and value the option as In general, we calculate the values of one-period call and put options as: Example
The price of a put option on MNO with exercise price 100 is found as 10.3 Interpreting...
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This document was uploaded on 02/15/2014 for the course BEM 103 at Caltech.
- Fall '08