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Compute the price of a derivative that pays 2u where u is the number of times that the stock goes up

 
 
Lisanne
 
Reply Thu 12 Nov, 2020 05:30 am
The current price of LC Corporation stock is $20. In each of the next three years, this stock price can either go up by 12% or go down by 4%. LC stock pays no dividends. The one-year risk-free interest rate is 6% and will remain constant.

Compute the price of a derivative that pays 2u where u is the number of times that the stock goes up

Note: Risk-neutral probabilities are constant in this case, you just need to compute them in one period.

Group of answer choices
a) 4.05
b) 4.29
c) 3.60
d) 3.26
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