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Hint: the discounting factor is to be replaced with e-t, where R is the risk-free interest rate per annum with continuous compounding (in this case 8%) and t is time measured in years (in this case t is one month, so t 12 Exercise 4. A stock price is currently 100S. Over each of the next two six-month periods it is expected to go up by 10% or down by 10%. The risk-free interest rate is 8% per annum with continuous compounding. What is the value of a one-year European call option with strike 1008? (3 points) Hint: see the hint of Exercise3.

Financial Math question
Please help me answer this question without excel
Much appreciate it !

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Answer #1

Strike price 100.00 Rf time time 6.18% 6 months 0.50 years $110.00 In the money profit 10.0o C1 100.00 90.00 Out of money profit $C2 T-0 Now the Profit at the period t-1 will be discounted back to period 0 at risk free rate Assume that probability of up move and down move is same i.e 0.5 Pu 0.50 Pd 0.50 So 8. 4.85

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