The stock of a computer company is currently trading at a market price of $60 pe

Question

                    The stock of a computer company is currently trading at a market price of $60 per share. During the next two years the return on the computer company's stock                     will have a yearly standard deviation of 45%. The risk free rate of interest is 3% per year compounded continously. An American call option on the company                     having a strike price of $57.50 and 18 months to expiration has a hedge ratio of .6681. The risk adjusted probability that the 18 month $57.50 call option will                     finish in the money is .4535. Assuming the company is NOT expected to pay a DIVIDEND during the next two years, determine                 

                    a. the value of an American Call Option on the company with 18 months to expiration and a $57.50 strike price.                 

                    b. the risk-adjusted probability that a European put option on Braeburn having 18 months to expiration and a strike price of $57.50 will finish in the money.                 

                    c. the value of an European put option on the company having 18 months to expiration and a strike price of $57.50.                 

Explanation / Answer

The total return measures the increase or decrease in wealth that an investor achieves from holding a particular investment. Focusing on only the income component or the capital gain or loss component can potentially miss an important determinant of an investor

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