Question
The price of Stock Y, which is currently $80, can go to $120, $90, or $60 in 6 months time. Security A pays $1 if
The price of Stock Y, which is currently $80, can go to $120, $90, or $60 in 6 months time. Security A pays $1 if the price of Stock Y in 6 months is $120, and zero otherwise. Security B pays $1 if the price of Stock Y in 6 months is $90, and zero otherwise. Security C pays $1 if the price of Stock Y in 6 months is $60, and zero otherwise. The prices of these securities are pA , pB , and pC , respectively. The discretely compounded risk-free interest rate is 5% per half-year (not annualised). When answering the questions below, explain your calculations
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