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You sell a European option with maturity 1 month, strike 30, and with an underlying assent of current value 60. The risk-free interest rate is
You sell a European option with maturity 1 month, strike 30, and with an underlying assent of current value 60. The risk-free interest rate is 5%. In 1 month, the value of the underlying asset can either 72 with probability 60% or 56 with probability 40%.
a) Compute the risk-neutral probabilities
b) Compute the price of the option
c) Find the replicating strategy
d) Compute the price of the option if the real probabilities are 80% to go up and 20% to go down.
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