A stock is currently priced at $43. A call option with an expiration of 1 year h
ID: 2742288 • Letter: A
Question
A stock is currently priced at $43. A call option with an expiration of 1 year has an exercise price of $45. The risk-free rate is 4 percent per year, compounded continuously, and the standard deviation of the stock’s return is infinitely large. What is the price of the call option? (Do not round intermediate calculations.)
A stock is currently priced at $43. A call option with an expiration of 1 year has an exercise price of $45. The risk-free rate is 4 percent per year, compounded continuously, and the standard deviation of the stock’s return is infinitely large. What is the price of the call option? (Do not round intermediate calculations.)
Explanation / Answer
If the standard deviation is infinite, d1 goes to positive infinity so N(d1) goes to 1, and d2 goes to negative infinity so N(d2) goes to 0. In this case, the call price is equal to the stock price, which is $43
Call Option Price $43
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