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Suppose that there are two possible states of the economy, A and B, in year T. A stocks price in year T will depend on
Suppose that there are two possible states of the economy, A and B, in year T. A stocks price in year T will depend on the economic state as in the table below. A risk-free bond currently sells for $8 and it will pay $10 in year T in every state.
state a | state b | |
stock | $150 | $80 |
bond | $10 | $10 |
In addition, we also see a year-T European call option on the stock above. The call has the strike price of $100 and currently sells for $20. What is the current stock price?
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