Imagine that Googles stock price will either rise by 25% or fall by 20% over the next

Question:

Imagine that Google’s stock price will either rise by 25% or fall by 20% over the next six months. Recalculate the value of the call option (exercise price = $430) using

(a) The replicating portfolio method and

(b) The risk-neutral method.

Explain intuitively why the option value falls from the value computed in Section 21-1.

Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...