Question

# Use the Black-Scholes methodology to ﬁnd, by direct calculation, an explicit formula for the fair price (at time

t) of the following contingent claims (European type options). The price of the underlying (stock) at time t is denoted by S(t); the time of maturity by T; the risk-free interest rate by r; the volatility of the underlying by σ.

(a) The stock or nothing call option: This is a claim that will pay exactly the price of the underlying in all cases where the price of the underlying at time T is larger or equal to K (and 0 in all other cases).

#### Top Answer

C= S(t)*N(d 1 ) - e -rT KN(d 2 ) d 1 =[ ln(S(t)... View the full answer