An asset price S is lognormally distributed if:
Find the first-order Taylor approximation p(x) for the function: at the point .
In a 2-step binomial tree, at each step the underlying price can move up by a factor of u = 1.1 or down by a factor of d = 1/u. The continuously compounded risk free interest rate over each time step is 1% and there are no dividends paid on the underlying. Use the Cox, Ross, Rubinstein parameterization to find the risk neutral probability and hence find the value of a European put option with strike 102, given that the underlying price is currently 100.
You invest $2m in a bank savings account with a constant interest rate of 5% p.a. What is the value of the investment in 2 years time if interest is compounded quarterly?
TESTED 24 Nov 2024
