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4. (10%) The current price of a non-dividend-paying biotech stock is $140 with a volatility of 25%. The risk-free rate is 4%. With Cox, Ross,
4. (10%) The current price of a non-dividend-paying biotech stock is $140 with a volatility of 25%. The risk-free rate is 4%. With Cox, Ross, and Rubinstein model, for a three-month time step: (a) What are the percentage of the up and down movements? (b) What are the probabilities of the up and down movements in a risk-neutral world? (c) Use a two-step tree to value a six-month European call option with the strike price of $150. (d) Suppose that a trader sells 1,000 European call options, how many shares of the stock are needed to hedge the position for the first three-month period? a a
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