(i) The length of each period is one year. (ii) The current stock price is $100.

Question

(i) The length of each period is one year.

(ii) The current stock price is $100.

(iii) The stock’s volatility is 35%.

(iv) The stock pays dividends continuously at a rate proportional to its price. The dividend yield is 5%.

(v) The continuously compounded risk-free interest rate is 10%.

A one-year European call option on the stock has a strike price of $90.

The continuously compounded expected rate of return on the call option is 20.5%.

Determine the continuously compounded expected rate of return on the stock:

Explanation / Answer

solution.

Expected Rate of Return = (Probability of Outcome x Rate of Outcome) + (Probability of Outcome x Rate of Outcome)

                                            = (.90 x10.5)

                                            = 9.45%

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.