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A stock index currently stands at 300 and has a volatility of 20%. The risk-free interest rate is 8% and the dividend yield on the
A stock index currently stands at 300 and has a volatility of 20%. The risk-free interest rate is 8% and the dividend yield on the index is 3%.
(a) Use the Black-Scholes-Merton formula to calculate the price of a six-month European call option with strike price 325 and the price of six-month European put option with strike price of 275.
(b) What is the cost of the range forward created using options in Part (a)?
(c) Use a two-step binomial tree to evaluate a six-month American put option on the index with a strike price of 300.
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