Chapter 03 · Section 3.1

Adjusted Distribution-1

Again consider the call with an exercise price of 40. Which probability distribution gives the highest call premium?

a) The thiner and taller distribution (in green).
• b) The wider and lower distribution (in pink).
  Yes. The distribution(b)is wider, that is underlying values at expiration that are far from the current underlying value are given a higher weight than with distribution (a). Continue

(Click here for help)