7. Consider a stock currently priced at $40. Assume that in each period of one month,...

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business finance

Answer 1

Answer #1

Current Price of the stock = $ 40

If the stock increases by 10% for next 2 months, the price of the stock will be = 40 * 1.1 * 1.1 = $ 48.4

If the stock decreases by 10% for next 2 months, the price of the stock will be = 40 * 0.9 * 0.9 = $ 32.4

Since, the possibility of each case is 50%, the expected value of the stock is = (0.50 * 48.4) + (0.50 * 32.4) = $ 40.40

Risk free rate of return = 2 %

Future Value of the 2-month value of the stock will be calculated by compounding 40 with a rate of 2% p.a and the value is = $ 40.132

Value of the Asian Put = max(40.40 - 40.132, 0) = $ 0.268

Answer 2

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