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Q1. You believe stock price by year end will have the following multinomial distribution: Price Probability 60 10% 80 20% 100 40% 120 20% 140

Q1. You believe stock price by year end will have the following multinomial distribution:

Price Probability

60 10%

80 20%

100 40%

120 20%

140 10%

Q1a. What should be the stock price TODAY?

Q1b. what is the prob that a 110 strike CALL will expire ITM?

Q1c. what is the conditional average price of underlying stock when 110 strike CALL expires ITM?

Q1d. what is the conditional average payment from the 110 strike CALL option when the CALL expires ITM?

Q1f. based on Q1b-Q1d, how much should the 110 CALL be priced at?

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Q1a To determine the stock price today we need to calculate the expected value of the stock price using the given probabilities Expected Stock Price 6... blur-text-image

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