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A stock price is currently $40. The risk-free interest rate is 12% per annum with continuous compounding. Annual continuously compounded volatility is 10%. Construct a binomial tree for two periods and calculate the value of the options by working back through the binomial tree.

a) What is your replicating portfolio today for a 6-month European put option with a strike price of $42?

b) What is the value of a 6-month European put option with a strike price of $42?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92834178

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