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A stock is currently priced at $73. The stock will either increase or decrease by 15 percent

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A stock is currently priced at $73. The stock will either increase or decrease by 15 percent over the next year. There is a call option on the stock with a strike price of $70 and one year until expiration. If the risk-free rate is 8 percent, what is the risk-neutral value of the call option?

Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
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Corporate Finance

Corporate Finance

ISBN: 978-0077861759

10th edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe

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A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.

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