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
Strike Price = 3
ReplyDeleteOptions 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