Calculate the value of a 1 year average price call

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Reference no: EM131240868

Suppose that a stock index is currently 900. The dividend yield is 2%, the risk-free rate is 5%, and the volatility is 40%.

Use the results in the appendix to calculate the value of a 1-year average price call where the strike price is 900 and the index level is observed at the end of each quarter for the purposes of the averaging.

Compare this with the price calculated by DerivaGem for a 1-year average price option where the price is observed continuously. Provide an intuitive explanation for any differences between the prices.

Reference no: EM131240868

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