Compute the risk free interest rate r

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Take the 1-period binomial model for a stock with the following data: So-14, u = 2, d = 0.5, where 1-period corresponds to one year and the bank account compounds continuously. Let φ denote a European option written on the stock (St)te(0.1) such that:·?φ (Si (u))-3 and Φd :-o(S (d)) I. Moreover, the market is free of arbitrage and the price of the derivative Φ(S) at time t = 0 is known to be 11(0: Φ) = 1.6504. Compute the risk free interest rate r.

Reference no: EM131888786

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