Current Stock price S(0) is $30; risk-free rate is 5%. There are
two possible outcomein one year, stock price might go up 30% (to
$39) or go down 30% (to $21). Considerboth a call and a put with
the same strike price of $30 and one year to maturity.
Current Stock Price S 0 Is 30 Risk Free Rate Is 5 There Are Two Possible Outcomein One Year Stock Price Might Go U 1 (65.53 KiB) Viewed 18 times
b. However you are not sure about your estimates of the probabilities and decide to check out your results under different scenarios. You write down the following scenarios (P is the probability of stock price to go up to $39): (18) P 1-P call price put price Stock return Call return Straddle Put return return 0.1 0.9 0.3 0.7 0.5 0.51 0.583335 0.416665 0.71 0.3 0.8 0.2 0.91 0.1 Optional question: What is your intuition on the expected returns on the call, the put and the straddle. (2)
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