Compute the risk neutral price of the call option
Course:- Finance Basics
Reference No.:- EM13712515

Assignment Help
Expertsmind Rated 4.9 / 5 based on 47215 reviews.
Review Site
Assignment Help >> Finance Basics

Tthe current price of a stock is S=20. It is known that at the end of 6 months the stock will be either Su= 24 or Sd=18.
1.Compute the risk neutral price of the call option with the strike price E= 21 and r = 5%.
2. Show that there exists arbitrage if the price of the call option is below the risk-neutral price. Consider a particular example- the price of the Call option with the above
parameters is C= 0.75. Show details for the abitrage (buy the call option and short sell delta shares). Show detailed computations for the arbitrage for S(T) = 18 and S(T)= 24.

Put your comment

Ask Question & Get Answers from Experts
Browse some more (Finance Basics) Materials
An investment generates $10,000 per year for 25 years. If you can earn 10% on other investments, what is the current value of this investment? If its current price is $120,0
Nielson expects to generate net income of $20 million over the next year. Currently Nielson has 8 million shares outstanding and its stock is trading at $20.00 per share. Ni
Sam's Corporation expects to pay a dividend of $6 per share at the end of year one, $9 per share at the end of year two, and then be sold for $136 per share at the end of year
Identify two microeconomics and two macroeconomics principles or concepts from the simulation. Explain why you have categorized these principles or concepts as microeconomic
A client makes a tax-deductible contribution of $4,000 to a traditional IRA. The client is in the 25% marginal tax bracket. How much are the approximate tax savings?
After 4 years, the machine must be replaced. Machine B costs $15 million and realizes after-tax inflows of $3.5 million per year for 8 years, after which it must be replaced.
What is forfaiting? Specify the type of traded goods for which forfaiting is applied ? What is countertrade? What motivates governments to establish so many guarantee and i
what is the break-even quantity of annual unit sales over the Boeing 777's projected 15-year life? Assume that all cash inflows and outflows occur at the end of the year.