Future prices of a stock are modeled with a one-period, Ask an Expert

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Future prices of a stock are modeled with a one-period binomial tree, the period being one year.

You are given:

(i) the stocks current price is 42

(ii)the continuously risk-free interest rate is 5%

(iii) the stock pays continuous dividend at a rate of 10%

(iv) sigma = 0.3

A European call option expiring in one year on the stock has strike price 40.

Determine

(a) the number of shares purchased/sold and the amount of money borrow/lent in the replicating portfolio for the call option;

(b) the premium of the call option

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92319533

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