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Problem:

The current price of a non-dividend-paying biotech stock is $140 with a volatility of 25%. The risk-free rate is 4%. For a three-month time step:

Required:

Question 1: What is the percentage up movement?

Question 2: What is the percentage down movement?

Question 3: What is the probability of an up movement in a risk-neutral world?

Question 4: What is the probability of a down movement in a risk-neutral world?

Use a two-step tree to value a six-month European call option and a six-month European put option. In both cases the strike price is $150.

Note: Please show how you came up with the solution.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M91162291

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