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Consider a stock that currently sells for $40. Over each of the next two six-month periods, the stock will either increase by 15% or decrease

  1. Consider a stock that currently sells for $40. Over each of the next two six-month periods, the stock will either increase by 15% or decrease by 15%. Semiannual risk-free rate is 3%. (Use risk-neutral probability approach.)
  1. What is the value of a European call option on this stock with an exercise price of $36 and expiration in one year?
  2. What is the value of a European put option on this stock with an exercise price of $36 and expiration in one year?
  3. Set the put-call parity between the options in parts a and b, and see if the parity holds. [Optional]

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