The returns on all assets are equal to risk-free rate

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1. Suppose you want to price a call option on WWW Inc. The current stock price of WWW is $60. The risk-free rate is 3%. What is the appropriate price of the 1 year call option of WWW Inc. with a strike price of $58 using risk-neutral approach? You project the stock price of WWW will either be $54 or $64 in a year.

2. Use put-call parity to verity the call option price from question 6 and the put option price from question 7 are valid since they are both based on the same underlying stock with the same maturity.

3. You try to price the put option on XYZ corp. The current stock price of XYZ is $100/share. The risk-free rate is 3%. What is the appropriate price of the 1 year put option of XYZ corp with a strike price of $110 using risk-free portfolio approach? You project the stock price of XYZ will either be $100 or $140 in a year. Assume we live in a risk-neutral world where the returns on all assets are equal to the risk-free rate.

Reference no: EM131906454

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