In: Finance
The price of a non-dividend paying stock is now $40. Over each of the next two three-month periods, it is expected to go up by 10% or down by 10%. The risk-free interest rate is 4% per annum with continuous compounding.
a. Calculate the risk-neutral probability p of an up-move over each three-month period
b. Calculate the value of a six-month European call option with a strike price of $42
c. Calculate the value of a six-month European put option with a strike price of $42
d. If the six-month put option was American instead of European, how would you expect its value to be different (higher, the same, or lower) than the European one? Please explain
ANSWER IN THE IMAGE ((YELLOW HIGHLIGHTED). FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE. THUMBS UP PLEASE.
A,B.
C.
D.