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The price of a stock is $120, and at expiration, in one year, the stock price will either be $144 or $100. The one-year future
The price of a stock is $120, and at expiration, in one year, the stock price will either
be $144 or $100. The one-year future value factor is 1.10. A derivative pays
(ST)^(1/2) at expiration, T=1 (that is, the payoff is equal to the square root of the stock price at
expiration).
a. Find the price of the derivative
b. Find the replicating portfolio. That is, find the change in (number of shares) and the amount of
borrowing or lending needed to create the same payout as the option.
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