Conditions for deterministic stock price path equity option
Explain the conditions for assuming a deterministic stock price path for an equity option.
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We have to impose several conditions upon the function r(t).• Forward rates must be positive, or here will be arbitrage opportunities.• Forward rates must be continuous (however this is commonsense rather than due to any financial argument).• Perhaps the curve must also be smooth.
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Mr. James K. Silber, an avid international investor, sold a share of Rhone-Poulenc only, a French firm, for FF42. The share was bought for FF42 year ago. The exchange rate is FF6.15 per U.S. dollar and was FF6.65 per dollar a year ago. Mr. Silber acquired FF4
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