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Question 1 A company's stocks are sold at $60 per share. In one year, they will be sold either at $50 or $70. The risk-free

Question 1

A company's stocks are sold at $60 per share. In one year, they will be sold either at $50 or $70. The risk-free rate is 5 percent. Call options on the company's stock will be expired in one year.

a) What is the value of option if the exercise price is $48 per share?

b) What is the value of option if the exercise price is $60 per share?

Lo = 6.19

c) Following (b), if each call option sells for $5.5 in the market and you are able to borrow or lend at the risk-free rate. Is there any arbitrage profit you can earn?

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A company's stocks are sold at $60 per share. In one year, they will be sold either at $50 or $70. The risk-free rate is 5 percent. Call options on the company's stock will be expired in one year. a) What is the value of option if the exercise price is $48 per share? b) What is the value of option if the exercise price is $60 per share? CO=6.19 c) Following (b), if each call option sells for $5.5 in the market and you are able to borrow or lend at the risk-free rate. Is there any arbitrage profit you can earn

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