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What is the continuously compounded risk-free

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The current share price of Winetowat Inc is $50. Future movements in Winetowat Inc's share price are well-described by a continuous process with no jumps and constant volatility. The volatility of the continuously compounded return on Winetowater's stock is 30% per annum. The risk-free rate with annual compounding is 4% per annum.

(a) What is the continuously compounded risk-free rate per annum?

(b) What is the cost of acquiring a portfolio that could be dynamically managed to replicate the payoff from a three-month European-style PUT option on the stock of Winetowat with an exercise price of $48? Note, these are the payoffs to a put option, not a call.

Reference no: EM132804601

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