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A stock that currently trades at $40 can either move up or down by 5 percent each year. The continuously compounded risk-free rate is 4 percent. An over-the-counter European call option with 2 years until expiration is set up so that the strike price is determined by the formula $40 + [(years to expiration + 1) × 0.5] in periods when the stock price increases. In periods when the stock price declines, the strike price is $40. What is the value of this 2-year specialized OTC call option? A. $3.12. B. $3.27. C. $2.56. D. $2.74. |