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A stock is currently worth $120. Over the next year, it can either increase by 10% or drop by 20%. The risk-free rate is 6%.

1. What is the price of a call option with strike price $130 that matures in 1 year?

2. What is the (risk-neutral) probability that the stock will increase in value?

3. What assets would you hold to form a risk-free portfolio?

4. Consider again the same problem but price a two-year dated call option.

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