Consider Pricing an Exchange Option on Two Stocks

question 7

Multiple Choice

Consider pricing an exchange option on two stocks. Assume the usual lognormal returns distributions on the stock prices as in Magrabe's formula. Which of the following input variables does NOT affect the probability of the option being in-the-money at maturity?

• A) The volatility of the assets' returns.
• B) The risk-free rate.
• C) The correlation between the two assets' returns.
• D) The time to maturity of the option.

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