- A A Exercise 5 2 Consider A One Step Market Consisting Of A Bond And A Stock The Price Of The Stock Is 8 Initially An 1 (106.99 KiB) Viewed 79 times
a a Exercise 5.2. Consider a one-step market consisting of a bond and a stock. The price of the stock is £8 initially an
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a a Exercise 5.2. Consider a one-step market consisting of a bond and a stock. The price of the stock is £8 initially an
a a Exercise 5.2. Consider a one-step market consisting of a bond and a stock. The price of the stock is £8 initially and can rise or fall by £1 at each time step. The bond has interest rate r = 5%. i. Calculate the price of a European call option on this stock with a strike price of £7.50. ii. Now consider a two-step market with the stock price rising or falling by £1 at each step. Calculate the price of this European call option at time 0. Will the risk-neutral probabilities at both steps be the same? Why? It would be helpful to draw a tree.