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3) The volatility of a non-dividend-paying stock whose price is $40, is 18%. The risk-free rate is 5% per annum (continuously compounded) for all maturities.

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3) The volatility of a non-dividend-paying stock whose price is $40, is 18%. The risk-free rate is 5% per annum (continuously compounded) for all maturities. Use a two-step tree to calculate the value of a derivative that pays off (max(St. 38,0)]2 where S, is the stock price in four months

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