A stock price is currently $60. It is known that at the end of two months it will be either $57 or 63. The risk-free interest rate is 10% per annum with continuous compounding. Suppose St is the stock price at the end of two months. What is the value of a derivative that pays off (St^1/3 - 4) at this time?
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This derivative can be found using the following equation: St^1/3 - 4 = (60 - 57) * 10% = -5.7% Show more…
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