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Exercise 5.2. Consider a one-step market consisting of a bond and a stock. The price of The stock is 8 initially and can rise or

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Exercise 5.2. Consider a one-step market consisting of a bond and a stock. The price of The stock is 8 initially and can rise or fall by 1 at each time step. The bond has interest rate Y 5%. i. Calculate the price of a European call option on this stock with a strike price of [1 mark] ii. Now consider a two-step market with the stock price rising or falling by 1 at each step. Calculate the price of this European call option at time 0. Will the 7.50 risk-neutral probabilities at both steps be the same? Why? It would be helpful to draw a tree [3 marks]

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