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Suppose that we have a stock with a price of $60 today and that in one year, the price will be either $90 or $30.
Suppose that we have a stock with a price of $60 today and that in one year, the price will be either $90 or $30. The risk-free rate is 10%. Consider the payoffs to a call option with a strike price of $60. what is the value of the call option?(Hint: construct a portfolio with the stock and the risk-free bond to replicate the payoff structure of the call option.The value of the call option today must be equivalent to the value of the replication portfolio to prevent arbitrage.
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