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Suppose that Stock X is currently selling for $60, but it can go up to $65 or down to $55 in 2 months. There is a European stock call option with an exercise price of $54. The risk-free rate of interest today is 2%. (1) Discuss your strategy to replicate a long position in a call in valuing it. (2) Discuss your strategy to formulate a riskless portfolio in words. (3) Compute the option delta. (4) Compute the price for the call and explain why this is a no arbitrage way of computing the call. (5) Compute the price for the call, but now by using the risk neutral valuation method.

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Financial Accounting, Accounting

Category:- Financial Accounting
Reference No.:- M92090808

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