Question

A call option has an exercise price of $70 and matures in six months. The current stock price is $71, and the risk-free rate is 4 percent per year, compounded continuously. What is the price of the call if the standard deviation of the stock is 0 percent per year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

=$0.98

Step-by-step explanation:

GIVEN DATA:

amount to be matures is $70

current stock price is $71

risk free rate 4%

since standard deviation for stock is given as 0 therefore price os stock is remain same i.e. $71

pay off amount is $71 -$70 = $1

maturity period is of 6 month thus amount of call is calculated as

`= 1 * e^(-0.04 * 0.5)`

`= 1* 0.9801`

=$0.98