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The current price of a stock is 100. In three months from now its price will either be 125 or 80. The constant risk-free interest
The current price of a stock is 100. In three months from now its price will either be 125 or 80. The constant risk-free interest rate is 9.877% per year with continuous compounding. Using a two-period binomial model, answer the following questions (show the details of your calculations and present them with four decimal places).
- Calculate the upward move 'u' and the downward move 'd'.
(5 marks)
- Calculate the risk-neutral probability 'p'.
(5 marks)
- Calculate the price of a European call option with a strike price of 100 and a maturity of three months.
(10 marks)
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