Assume that the continuously compounded interest rate equals 0.10.
Stock S has the current price of S(0) = 70 and does not pay dividends. Stock Q has the current price of Q(0) = 65 and it pays continuous dividends at the
rate of 0.04.
An exchange option gives its holder the right to give up one share of stock Q for a share of stock S in exactly one year. The price of this option is
Another exchange option gives its holder the right to give up one share of stock S for a share of stock Q in exactly one year. Find the price of this
(a) About $3.95
(b) About $11.10
(c) About $12.00
(d) About $14.25
(e) None of the above.
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