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The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. The risk-free rate is 5%. a) Use the no-arbitrage approach to find the price of a European 6-month call option with a strike price of $32 b) Use risk-neutral valuation to find the price of a European 6-month put option with the same strike price.

The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. The risk-free rate is 5%. a) Use the no-arbitrage approach to find the price of a European 6-month call option with a strike price of $32 b) Use risk-neutral valuation to find the price of a European 6-month put option with the same strike price.

Intermediate Financial Management (MindTap Course List)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter5: Financial Options
Section: Chapter Questions
Problem 7P
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The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. The risk-free rate is 5%. a) Use the no-arbitrage approach to find the price of a European 6-month call option with a strike price of $32 b) Use risk-neutral valuation to find the price of a European 6-month put option with the same strike price.
Transcribed Image Text:The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. The risk-free rate is 5%. a) Use the no-arbitrage approach to find the price of a European 6-month call option with a strike price of $32 b) Use risk-neutral valuation to find the price of a European 6-month put option with the same strike price.
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