A non-dividend-paying stock has a current price of 800 ngwee. In any unit of time (t, t + 1) the price of the stock either increases by 25% or decreases by 20%. K1 held in cash between times t and t + 1 receives interest to become K1.04 at time t + 1. The stock price after t time units is denoted by St. Required: I. Calculate the risk-neutral probability measure for the model. II. Calculate the price (at t = 0) of a derivative contract written on the stock with expiry date t = 2 which pays 1,000 ngwee if and only if S2 is not 800 ngwee (and otherwise pays 0
A non-dividend-paying stock has a current price of 800 ngwee. In any unit of time (t, t + 1) the price of the stock either increases by 25% or decreases by 20%. K1 held in cash between times t and t + 1 receives interest to become K1.04 at time t + 1. The stock price after t time units is denoted by St. Required: I. Calculate the risk-neutral probability measure for the model. II. Calculate the price (at t = 0) of a derivative contract written on the stock with expiry date t = 2 which pays 1,000 ngwee if and only if S2 is not 800 ngwee (and otherwise pays 0
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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A non-dividend-paying stock has a current price of 800 ngwee. In any unit of time (t, t + 1) the price of the stock either increases by 25% or decreases by 20%. K1 held in cash between times t and t + 1 receives interest to become K1.04 at time t + 1. The stock price after t time units is denoted by St.
Required:
I. Calculate the risk-neutral probability measure for the model.
II. Calculate the price (at t = 0) of a derivative contract written on the stock with expiry date t = 2 which pays 1,000 ngwee if and only if S2 is not 800 ngwee (and otherwise pays 0).
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