Answer to Question #208141 in Financial Math for Wachira Ann Wangar

Question

The underlying asset price is $24. The risk free interest rate is 3% and the underlying asset volatility is 25%. What is the probability that the under underlying asset price will be greater than the strike price in three year's.

Answer 1

Let underlying asset price be; K=24

Let force of interest be; d=0.02

i=0.03

d=In(1+i)

=In(1.03)=0.02

K=S_oe^dt

24=S_oe^(0.02*3)

24=1.0618S_o

S_o=22.60

Rate of depreciation=25%=0.25

Price after 3 years=22.6*(1.25)^-3

=11.5712

Pr(K>S_o)=1-Pr(K<=S_o)=1-11.5712/24

=0.5179