Assume a stock price of S(0)= $62.00,r = 0.05,σ = 0.30,and dividend = 0.What is the price of a claim that pays $ \sqrt{S} $ ? Use formula 20.29.

Question

Quizplus · Accepted Answer

The correct answer is A because the price of a claim that pays $ \sqrt{S} $ is given by the formula 20.29 as:$$C=S(0)e^{-rT}N(d_2)$$where $$d_2=\frac{ln(S(0)/K)+(r+\frac{\sigma^2}{2})T}{\sigma\sqrt{T}}$$In this case, we have:$$S(0)= $62.00,r = 0.05,σ = 0.30,T=1,K=0$$So,$$d_2=\frac{ln(62/0)+(0.05+\frac{0.30^2}{2})1}{0.30\sqrt{1}}=2.0000$$And,$$C=62e^{-0.05(1)}N(2.0000)=7.59$$

Assume a Stock Price of S(0)= $62 S \sqrt{S} S​ ? Use Formula 20

Assume a Stock Price of S(0)= $62 $\sqrt{S}$ ? Use Formula 20