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#1




Actex Study Manual Exercise 5.2 #6
Can anyone help me with this one?
The Question is: Consider a stock that follows the BlackScholes framework. You are given: i) The current stock price is 50. ii) The stock pays dividend continuously at a rate proportional to its price. The dividend yield is 0.02. iii) The continuously compounded rate of appreciation on the stock is 0.05. iv) The median of the stock price at time 2 is 50. v) The continuously compounded riskfree interest rate is 0.02. Calculate the price of a 1year 50strike Euro put option. The solution does not use the dividend yield for getting the volatility of the stock from the median, yet use the dividend yield for getting d_1. Can someone please help me? Last edited by lilj0825; 12202018 at 04:02 AM.. 
#2




Statement iii) refers to the rate at which the stock's price increases. This already takes dividends into account  it is after dividends. The rate of return on the stock is 0.07.
On the other hand, the riskfree interest rate is the total riskfree rate of return (so it corresponds to the true rate of return of 0.07). Does that answer your question? 
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