Question

A stock S has value S = 2 today and in one year the value either doubles or halves. Assuming interest rates are zero, what is the strike of the one year forward on the stock assuming the stock pays no dividends?

Answer 1

Solution :-

Here the current stock price is $2

Now there is a equal probability of doubled of half therefore it means both have 50% - 50%

And also stock pays no dividend And here interest rate is Zero then it means there is no change in future value of this current price after one year therefore strike price is Same as Current Market Price that is $2

A Stock exercise price is based on the return of the stock expected change in value of stock but here there is no change as no dividend and zero interest rates

Due to half or doubles the fair OP of call and Put are equals and then as per the PCPT of call option and put option are equal then automatically strike price is equal to cmp