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A power call option pays off (max(Sr-X, 0)F at time T, where ST is the stock price at time T and X is the exercise price. A stock price is currently $65. It is known that at the end of one vear it be either S70 or $60. The risk-free rate of interest with continuous compounding is 5% per annum, Calculate the value of a one year power call option with an exercise price of S65 a. What is the delta of the power call option? b. What is the risk neutral probability of up movement? c. What is the value of the power option?
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