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1. Consider a stock that currently sells for $60. Over the next six months, the stock will either increase to $90 or decrease to $42.
1. Consider a stock that currently sells for $60. Over the next six months, the stock will either increase to $90 or decrease to $42. Semiannual risk-free rate is 2%. (Use replicating portfolio approach.)
a. What is the value of a European call option on this stock with an exercise price of $63 and expiration in six months?
b. What is the value of a European put option on this stock with an exercise price of $63 and expiration in six months?
c. Set the put-call parity between the options in parts a and b, and see if the parity holds. [Optional]
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