What are the risk neutral probabilities for this stock

Reference no: EM132210948

Question 1 - Consider a two-period stock model over a period of 6 months, with interest rate 4%. The initial price of the stock is €4, while in each period the stock may either increase by a factor of 2 or decrease by a factor of 1/2

(i) What are the risk neutral probabilities for this stock?

(ii) Find the arbitrage free price of a call option on this stock with strike price €6.

(iii) A look-back call option with strike price €K pays out nothing if the stock price never exceeded K over the lifetime of the option and pays out the difference between the maximum stock price and K if it did. Find the arbitrage free price of a look back call option on this stock with strike price €6

Question 2 - Repeat Question 1, but this time with three periods.

Reference no: EM132210948

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