Continuously compounded risk-free interest rate is r

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Reference no: EM13911571

Assume the Black-Scholes framework. The continuously compounded risk-free interest rate is r is unknown, but for a non-dividend paying stock S we know:

• The current stock price S0 = 10

• The stock0s volatility is 10%.

• The price of a 6-month European gap call option on S, with a strike price of K1 = 10 and a payment trigger of K2 = 9:90, is 1.

• The price of a 6-month European gap put option on S, with a strike price of K1 = 10 and a payment trigger of K2 = 9:90, is 0:50.

The denition of the payos is then GGapCall(S) = (S -K1)1{S>K2}

GGapPut(S) = (K1 -S)1{S<K2}

Calculate r

Reference no: EM13911571

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