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RTM Mining, a common stock that pays no dividend, trades at $15 per share. The company is heavily invested in a new mining project. Your
RTM Mining, a common stock that pays no dividend, trades at $15 per share. The company is heavily invested in a new mining project. Your analysis shows that if the production in the mine takes off, the stock will jump to $18 in six months, and if the production turns out to be poor, the price will drop to $12 in six months. These are the only two possible prices in six months. The risk- free rate of interest (continuously compounded) is 3% per year. CAPM beta is 1.5, and expected equity market risk premium is 5% annually (continuously compounded). a. Calculate the current value of a six-month, at-the-money, European call option on one share of RTM Mining stock. Use continuous compounding. b. Using put-call parity, find the current value of a six-month put option on the same stock at the same time with the same parameters as in part a) above. Use continuous compounding
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