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Calculate the value of a one year power call option

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Reference no: EM132668085

As a financial analyst at Citibank Derivative Trading desk, you have collected data for a power option. A power call option pays off (max(ST-X, 0))2 at time T, where ST is the stock price at time T and X is the exercise price. A stock price is currently $60. It is known that at the end of one year it will be either $66 or $54. The risk-free rate of interest with continuous compounding is 5% per annum. Calculate the value of a one year power call option with an exercise price of $60.

  • What is the delta of the option?
  • What is the risk neutral probability of up move?
  • What is the value of the option?

Reference no: EM132668085

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