The current price of a nondividend-paying stock is S(0) = 100. The price of the stock at
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The current price of a nondividend-paying stock is S(0) = 100. The price of the stock at the end of one year, S(1), is either 90 or 120. The continuously compounded risk-free interest rate is 10%.
Consider a derivative security that pays [S(1)]2 at the end of one year.
(a) Determine the replicating portfolio for the derivative, i.e., find B and ∆.
(b) Calculate the current price of the derivative.
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a Replicating Portfolio A replicating portfolio is a combination of assets that perfectly replicates ...View the full answer
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