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Describe a strategy to replicate the payoff of a European call with maturity 2 years and strike price $100, using the stock and the risk-free
Describe a strategy to replicate the payoff of a European call with maturity 2 years and strike price $100, using the stock and the risk-free bond. It is given that a stock price can rise by 15% or drop by 5% annually, with probability of 0.5 each. Given risk-free interest rate of 5% annually and current stock price is $100. [8 marks]
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