consider the Europe option on a dividend paying stock where the stock price is m
ID: 1886433 • Letter: C
Question
consider the Europe option on a dividend paying stock where the stock price is maturity is one year. Answer the following question assuming no recovery in the event of default and that the probability of default of the option valuation.A) What is the value of the option assuming no possibility of default?
B) What is the value of the option to the buyer if there is a 2% chance that option seller will default at maturity?
c) Suppose that instead of paying the option price upfront, the option buyer agrees to pay the forward value of the option price at the end of the option
Explanation / Answer
A) same as stock price in one year B) 98% of the price C) same as A D) same as B
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