A stock is priced at 125.37, the continuously compounded risk-free rate is 4.4 percent, and the volatility is 21 percent. There are no dividends. Answer the following questions.
a. Determine a fair price for a two-year asset- or-nothing option with exercise price of 120.
b. Assuming you purchased the asset-or- nothing option at the price you determined in a, calculate your profit if the asset price at expiration is (1) 138 and (2) 114.
c. Determine a fair price for a two-year cash or-nothing option with exercise price of 120 that pays 120 if it expires in-the-money.
d. Assuming you purchased the cash-or-nothing option at the price you determined in c, cal- culate your profit if the asset price at expiration is (1) 138 or (2) 114.