Firsts current stock price is 260 the price may rise to 300, Ask an Expert

Accounting

First's current stock price is $260. The price may rise to $300 or fall to $170 in one month. The risk-free interest rate is 18% per year.

a. Using the replication portfolio approach, determine the price of a call on First's stock with an exercise price of $280 and one month maturity.

b. Using the risk neutral approach, determine the price of a put on First's stock with an exercise price of $280 and one month maturity.

c. If the call option in part (a) is selling at $12, show how you can make arbitrage profit.

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Financial Accounting, Accounting

Category:- Financial Accounting
Reference No.:- M9525025

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