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Unformatted text preview: oneperiod 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
diagram
Call Option ✻
✲ Alternatively we could use the formula: In this case, the two possible values of the underlying in this case are
and
.
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
and
. We use these prices to ﬁnd
and : 92 Pricing Derivatives and value the option as In general, we calculate the values of oneperiod 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
 Lehmann,B

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