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One Binomial Period To Determine Stock Prices And Fair Value

Question

Consider a stock worth $25 that can go up or down by 15% per period. The risk-free rate is 10%. Use one binomial period to.

a.    Determine the two possible stock prices at the end of the period.
b.    Determine the fair value at expiration of a European call option with an exercise price of $25.
c.    Construct a hedge portfolio. Assuming that the call sells for the value you obtained in part c.

Summary

The question belongs to Finance and it discusses about using one binomial period for determining two possible stock prices at the end of the period, the fair value at expiration of call option and to construct a hedge portfolio, assuming the call sells for the value.

Total Word Count 192

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