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Hello students, here is a question.
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A stock price is currently $50.
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It is known as that the end of 6 months it will be either $52 or $48.
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The risk free interest rate is 5 % per annum with a continuous compounding.
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What is the value of 6 months european call option with a strike price of $50 and verify no attribute argument of a risk neutral valuation agreement to give the same answer.
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And the second question is a stock price is currently $60.
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It is known that there is an end of 8 months.
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It will be either $65 or $55.
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The risk free interest rate will be 8 % per annum with a continuous compounding.
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What is the value of 8 months of european put option with a strike price of $60.
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So verify that no attribute agreements and the risk neutral valuation arguments give the same answer.
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So this is our question.
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Let us discuss the answer for this.
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First we need to calculate the risk neutral probability.
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Calculate risk neutral probability that could be p is equal to e to the power rt minus d by u minus d...