ABC stock is currently at 100. In the next period, the price will either increase by 5%
Question:
ABC stock is currently at 100. In the next period, the price will either increase by 5% or decrease by 5%. The risk-free rate of return per period is 3%. Consider a put option on ABC stock with strike K = 100.
(a) Set up a replicating portfolio to value the put.
(b) Suppose the put is trading for $2. Explain how you would exploit the resulting arbitrage opportunity.
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Step by Step Answer:
In this scenario well use the binomial option pricing model which revolves around constructing a replicating portfolio to value the put option a Set up a replicating portfolio to value the put In the ...View the full answer
Answered By
Jehal Shah
I believe everyone should try to be strong at logic and have good reading habit. Because If you possess these two skills, no matter what difficult situation is, you will definitely find a perfect solution out of it. While logical ability gives you to understand complex problems and concepts quite easily, reading habit gives you an open mind and holistic approach to see much bigger picture.
So guys, I always try to explain any concept keeping these two points in my mind. So that you will never forget any more importantly get bored.
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