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A stock is priced at 125.37, the continuously compounded risk-free rate is 4.4 percent, and the volatility is 21 percent. There are no dividends. Answer the following questions.
a. Determine a fair price for a two-year assetor-nothing option with exercise price of 120.
b. Assuming you purchased the asset-ornothing option at the price you determined in a, calculate your profit if the asset price at expiration is (1) 138 and (2) 114.
c. Determine a fair price for a two-year cashor-nothing option with exercise price of 120 that pays 120 if it expires in-the-money.
d. Assuming you purchased the cash-or-nothing option at the price you determined in c, calculate your profit if the asset price at expiration is (1) 138 or (2) 114.
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