Question

A stock price is currently $$\$ 25$$. It is known that at the end of 2 months it will be either $$\$ 23$$ or $$\$ 27$$. The risk-free interest rate is $10 \%$ per annum with continuous compounding. Suppose $S_T$ is the stock price at the end of 2 months. What is the value of a derivative that pays off $S_T^2$ at this time?

   A stock price is currently $$\$ 25$$. It is known that at the end of 2 months it will be either $$\$ 23$$ or $$\$ 27$$. The risk-free interest rate is $10 \%$ per annum with continuous compounding. Suppose $S_T$ is the stock price at the end of 2 months. What is the value of a derivative that pays off $S_T^2$ at this time?

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Options, Futures, and Other Derivatives

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 13, Problem 14

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Step 1

The risk-free interest rate is given as 10% per annum with continuous compounding. To calculate the interest rate for 2 months, we need to divide the annual interest rate by 12 (since there are 12 months in a year) and multiply it by 2 (since we are considering a Show more…

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A stock price is currently $$\$ 25$$. It is known that at the end of 2 months it will be either $$\$ 23$$ or $$\$ 27$$. The risk-free interest rate is $10 \%$ per annum with continuous compounding. Suppose $S_T$ is the stock price at the end of 2 months. What is the value of a derivative that pays off $S_T^2$ at this time?

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