Question

A call option has an exercise price of $70 and matures in six months. The current stock price is $71, and the risk-free rate is 4 percent per year, compounded continuously. What is the price of the call if the standard deviation of the stock is 0 percent per year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

=$0.98

Explanation:

GIVEN DATA:

amount to be matures is $70

current stock price is $71

risk free rate 4%

since standard deviation for stock is given as 0 therefore price os stock is remain same i.e. $71

pay off amount is $71 -$70 = $1

maturity period is of 6 month thus amount of call is calculated as

$= 1 \times e^{-0.04 \times 0.5}$

$= 1\times 0.9801$

=$0.98