I asked this question (provided below) and was able to follow the response. I also got the same answer when I worked it out on my own. I do have one question, though. In the solution provided it states "risk-free rate, r=mu=0.12" My question is--why are r and mu the same thing? The prices of a certain security follow a geometric Brownian motion with parameters mu=.12 and sigma=.24. If the security's price is presently 40, what is the probability that a call option, having four months until its expiration time and with a strike price of K=42, will be exercised? (A security whose price at the time of expiration of a call option is above the strike price is said to finish in the money).

I asked this question (provided below) and was able to follow the response. I also got the same answer when I worked it out on my own. I do have one question, though. In the solution provided it states "risk-free rate, r=mu=0.12" My question is--why are r and mu the same thing? The prices of a certain security follow a geometric Brownian motion with parameters mu=.12 and sigma=.24. If the security's price is presently 40, what is the probability that a call option, having four months until its expiration time and with a strike price of K=42, will be exercised? (A security whose price at the time of expiration of a call option is above the strike price is said to finish in the money).

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 2Q: Security A has an expected rate of return of 6%, a standard deviation of returns of 30%, a...

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