Calculate the cost of derivative

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Reference no: EM13848659

Assume the Black-Schools framework. Let S be a stock such that S(0) = 10, and the dividend rate is 4% compounded continuously. Let C be a derivative that pays 100S(2)^(−1 )two years from now. In addition, the risk free rate is r = 0.11, and the volatility is 0.5.

(a) Calculate the expected payoff of C.

(b) Calculate the cost of this derivative.

Please explain that how to get strike price and the meaning of " Let C be a derivative that pays 100S(2)^(−1 )two years from now.".

Reference no: EM13848659

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