Assume that the continuously compounded interest rate

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Assume that the continuously compounded interest rate equals 0.10.

Stock S has the current price of S(0) = 70 and does not pay dividends. Stock Q has the current price of Q(0) = 65 and it pays continuous dividends at the rate of 0.04.

An exchange option gives its holder the right to give up one share of stock Q for a share of stock S in exactly one year. The price of this option is $11.50.

Another exchange option gives its holder the right to give up one share of stock S for a share of stock Q in exactly one year. Find the price of this option.

(a) About $3.95
(b) About $11.10
(c) About $12.00
(d) About $14.25
(e) None of the above.

Reference no: EM13484284

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