If the interest rate is 8%, what is the risk-neutral valua- tion of the call option specified in Exercise 7.2? Exercise 7.2 The prices of a certain security follow a geometric Brown- ian motion with parameters u = .12 and o = .24. If the security’s price is presently 40, what is the probability that a call option, having four months until its expiration time and with a strike price of K = 42, will be exercised? (A security whose price at the time of expiration of a call option is above the strike price is said to finish in the money.)
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