Help Me Please - Options Question - WSO Last Resort
A non-dividend paying stock is currently priced at $50 per share. Its volatility is flat at 25% per annum with continuous compounding. The relevant funding rate r is 5% with continuous compounding. A European-style option on this stock pays off $55 if the stock price in 6 months is above $55 and nothing if its below $55. Another European-style option on this stock pays off the stock price in 6 months if that price is above $55 and nothing if it is below $55. What are the prices of these two options? Compare them with the price of a plain-vanilla call option (also European-style) with strike price $55 and maturity 6 months.
Word for word. I consider myself to be pretty analytical but I have absolutley no idea where to begin and you guys are my last resort. I am NOT asking for solution but a start of some sort. The professor used derivagem a lot if it helps at all.
We haven't covered this in class all year and I haven't found anything similiar to this in John Hull's text. Any help is greatly appreciated guys.
you can start by: http://en.wikipedia.org/wiki/Binary_option
Bless you child. I just finished it and without your help, I'd still be staring at the problem.
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