(a) Consider a chooser option on a stock. At time 1.5, its holder will choose whether it becomes a European call option

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A Consider A Chooser Option On A Stock At Time 1 5 Its Holder Will Choose Whether It Becomes A European Call Option 1 (89.53 KiB) Viewed 9 times

(a) Consider a chooser option on a stock. At time 1.5, its holder will choose whether it becomes a European call option or a European put option, each of which will expire at time 5 with a strike price of $70. Chooser option price is $34.10 at time t= 0. The stock price is $80 at time t = 0. Let P(K,T) denote the price of a European put option at time t = 0 on the stock expiring at time T, T>0, with a strike price of K. You are given: (i) (ii) (iii) The risk free interest rate is 4%. The stock pays dividends at a continuously compounded rate of 0.5%. P(70,1.5)=5.78, P(68,1.5)=5.07, P(66,1.5)=4.41 P(64,1.5) 3.81, P(62,1.5)=3.26, P(60,1.5)=2.76 Determine P(70,5). (6 marks)