Discounted expected payoff of derivative in risk-neutral

Assignment Help Financial Management

Reference no: EM131048239

A stock is currently priced at $25. In 6 months it will either be $26 or $30. The risk-free rate is 12% per annum with continuous compounding.

Verify the assumption on u and d given the following theorem:

Theorem: If the market has no arbitrage opportunities, then the price of any derivative that can be replicated with traded assets such as stock and cash, is the discounted expected payoff of the derivative in the risk-neutral world.

Could someone please explain an answer for this problem?

Reference no: EM131048239

Questions Cloud

Compute the amount that he must invest today : Newton Kris's plans to give her son $12500 when he is 21 which will be 5 years from now. if Newton finds an investment that will pay 8% compounded semiannually compute the amount that he must invest today to achieve his goal.

Present value of your annual cash payments : You have an opportunity to invest in a business venture. For just $50,000 invested on January 1st, you will receive $20,000 in after-tax cash flows per year on December 31st for 3 years. Using these factors, what is the Present Value of your annual c..

What is the estimated required rate of return on stock : Woidtke Manufacturing's stock currently sells for $37 a share. The stock just paid a dividend of $1.75 a share (i.e., D0 = $1.75), and the dividend is expected to grow forever at a constant rate of 4% a year. What stock price is expected 1 year from ..

How does each text reflect broader themes of gelvins book : How does each text reflect the broader themes of Gelvin's book? To phrase it a different way: why did the author choose these texts to include as examples?

Discounted expected payoff of derivative in risk-neutral : A stock is currently priced at $25. In 6 months it will either be $26 or $30. The risk-free rate is 12% per annum with continuous compounding. Theorem: If the market has no arbitrage opportunities, then the price of any derivative that can be replica..

Changing role of management accountants : ACC8000 - Distinguish between explanatory sequential mixed methods and exploratory sequential mixed methods explaining when each type of research design might be appropriate.

Different possible spot rates at option maturity : Consider a PUT option on euros with a strike price of $1.05/€ and an option premium of 8 cents per euro. Calculate the profit (net of the cost of the option) to the holder of the option for the following different possible spot rates at option maturi..

Bond issue outstanding with annual coupon-value of the bond : Potter Industries has a bond issue outstanding with an annual coupon of 6% and a 10-year maturity. The par value of the bond is $1,000. If the going annual interest rate is 8.8%, what is the value of the bond? Round your answer to the nearest cent. D..

Produce a growing webliography of research sources : You are asked to produce a growing "webliography" of research sources. As students conduct research for each of their discussions and their project

User Account

All Pages