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Consider a put option on a stock that currently sells for 100, but may rise to 120 or fall to 80 after 1 year.
Consider a put option on a stock that currently sells for 100, but may rise to 120 or fall to 80 after 1 year. The risk free rate of return is 10%, and the exercise price is 90. (a) Calculate the value of the put option using the risk-neutral valuation relationship (RNVR). Explain the reasoning behind your calculations. [10 marks] (b) Calculate the value of the put option by using first principles (No Arbitrage prin- ciples). Explain the reasoning behind your calculations. [10 marks] (c) What is the price of a call option on the same stock with the same exercise price and the same expiration date? Explain the reasoning behind your calculations. [10 marks] (d) Is there an arbitrage opportunity in this market? Explain. [10 marks]
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