(a) RBS stock and Barclays's Stock are both currently priced at $50. RBS stock has a volatility of 20% per annum and pay

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(a) RBS stock and Barclays's Stock are both currently priced at $50. RBS stock has a volatility of 20% per annum and pay

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A Rbs Stock And Barclays S Stock Are Both Currently Priced At 50 Rbs Stock Has A Volatility Of 20 Per Annum And Pay 1
A Rbs Stock And Barclays S Stock Are Both Currently Priced At 50 Rbs Stock Has A Volatility Of 20 Per Annum And Pay 1 (78.98 KiB) Viewed 10 times
(a) RBS stock and Barclays's Stock are both currently priced at $50. RBS stock has a volatility of 20% per annum and pays dividends at a continuously compounded rate of 5% per annum. Barclays's Stock has a volatility of 30% per annum and pays dividends at a continuously compounded rate of 3% per annum. The correlation between the log-share prices is 0.5. The continuously compounded risk-free rate of return is 6% per annum. An exchange option permits the holder to receive 1 share of Barclays's Stock in exchange for 1 share of RBS stock in 6 months. Calculate the current value of the exchange option by using the Black-Scholes model. (7 marks)
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