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In a one-period model, the share price starts at $10 and in one year's time is either $12 or $6. Assume interest rates are 0
In a one-period model, the share price starts at $10 and in one year's time is either $12 or $6. Assume interest rates are 0 . (a) Construct a replicating portfolio for a one year call option with strike K=$9. (b) Explain how The Law of One Price allows you to calculate the premium of the call option. (c) Construct risk-neutral probabilities for the model for the share price and verify the risk-neutral value for the call option is the same as the value given by the replicating portfolio
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