Question

What is the value of a derivative that pays off $$\$ 100$$ in 6 months if an index is greater than 1,000 and zero otherwise? Assume that the current level of the index is 960 , the riskfree rate is $8 \%$ per annum, the dividend yield on the index is $3 \%$ per annum, and the volatility of the index is $20 \%$.

   What is the value of a derivative that pays off $$\$ 100$$ in 6 months if an index is greater than 1,000 and zero otherwise? Assume that the current level of the index is 960 , the riskfree rate is $8 \%$ per annum, the dividend yield on the index is $3 \%$ per annum, and the volatility of the index is $20 \%$.

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Options, Futures, and Other Derivatives

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 26, Problem 18

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Step 1

To calculate the risk-neutral probability, we need to use the risk-free rate, dividend yield, and volatility of the index. Risk-neutral probability = (Risk-free rate - Dividend yield) / Volatility Risk-neutral probability = (0.08 - 0.03) / 0.20 = 0.25 Show more…

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What is the value of a derivative that pays off $$\$ 100$$ in 6 months if an index is greater than 1,000 and zero otherwise? Assume that the current level of the index is 960 , the riskfree rate is $8 \%$ per annum, the dividend yield on the index is $3 \%$ per annum, and the volatility of the index is $20 \%$.

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