Dividends and interest rates are assumed to be zero compute


Consider a security that yields a positive payoff of $100 if the stock price at maturity is lower than or equal to $70 and a positive payoff of $50 if the stock price at maturity is between $70 and $80. If the stock price at maturity is larger than or equal to $80, the security has a payoff of zero. Assume that the initial stock price is $80, the maturity of the security is one year, and the stock volatility is 50% p/a. Assume that the stock price follows a lognormal distribution. Dividends and interest rates are assumed to be zero. Compute the price of this security. NO BLACK SCHOLES MODEL

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Financial Management: Dividends and interest rates are assumed to be zero compute
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