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A stock is currently priced at $35.00. The risk free rate is 3.4% per annum with continuous compounding. In 10 months, its price will be
A stock is currently priced at $35.00. The risk free rate is 3.4% per annum with continuous compounding. In 10 months, its price will be either $39.20 or $29.40. Consider the portfolio with the following: long a European call with strike $38.00 expiring in 10 months; a short futures position on the stock with delivery date in 10 months and delivery price $31.00; a derivative which pays, in 10 months, three times the price of the stock at that time. Using the binomial tree model, compute the price (or "value") of this portfolio.
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