Consider an asset with zero volatility. We can explicitly calculate the future value of the asset and
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Consider an asset with zero volatility. We can explicitly calculate the future value of the asset and hence that of a call option with the asset as the underlying. The value of the call option will then depend on the growth rate of the asset, μ. On the other hand, we can use the explicit formula for the call option, in which μ does not appear. Explain this apparent contradiction.
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Explanation The apparent contradiction is due to the fact that the future val...View the full answer
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