The price of a certain security follows a geometric Brownian
motion with drift parameter 0,6 and volatility parameter 0,34. The
present price of the security is 95. If the interest rate is 4%,
find the no-arbitrage cost of a call option that expires in three
months and has exercise price 100. What is the probability that the
call option in part (a) is worthless at the time of expiration?
Suppose that a new type of investment on the security is being
traded. This investment returns 50 at the end of one year if the
price six months after purchasing the investment is at least 105
and the price one year after purchase is at least as much as the
price was after six months. Determine the no-arbitrage cost of this
investment.