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The current price of a non-dividend-paying stock is $62.67 and you expect the stock price to either go up by a factor of 1.424 or
The current price of a non-dividend-paying stock is $62.67 and you expect the stock price to either go up by a factor of 1.424 or down by a factor of 0.702 over the next 0.5 years.
A European call option on the stock has a strike price of $63 and expires in 0.5 years. The risk-free rate is 7% (annual, continuously compounded).
1.What is the option payoff if the stock price goes up?
2.What is the risk-neutral probability of an up movement?
3.What is the value of the option?
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