In: Finance
A binary option pays off $150 if a stock price is greater than $40
in three months. The current stock price is $35 and its volatility is 35%. The risk-free
rate is 4% and the expected return on the stock is 10%.
3.1 What is the value of the option?
3.2 What is the real-world probability that the payoff will be
received?
Given:
The probability distribution of is
Since
the probability of the stock price being above $40 in 3 months time =
3.1. value of the option = 0.3078*4150 = $46.17
3.2. real-world probability that the payoff will be received = 0.3078