Wednesday, 11 July 2012

Option on a dice

For Finance Enthusiasts
What will be the price of the option on the roll of a dice if the strike value is 3?

1 comment:

  1. Strike Price = 3
    Options are priced such that expected gain becomes 0. Suppose option price is X
    then, if 1,2,3 comes, you won't exercise ur option, therby net payoff = -x(Option price)
    if 4,5,6 comes, you will exercise and payoff would be = number - 3 - x

    Expected Gain = 1*P(4) +2*P(5) +3*P(6) - x = 0
    x = 1

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