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ABC Corp. stock currently sells for $70 per share. One year from today the stock will be worth either $95 or $65 per share with
ABC Corp. stock currently sells for $70 per share. One year from today the stock will be worth either $95 or $65 per share with probabilities 45% and 55% respectively. One-year T-bill currently yields 5%.
a) Whats the expected return of the ABC stock?
b) What is the fair value of a European call option on ABC stock with one year to expiration and a $75 exercise price?
c) Describe a portfolio that perfectly replicates this call option.
d) Suppose the call option is trading for $5. Carefully describe what you would do.
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