There are two stocks, A and B, both trading at price $20. Consider a one-period binomial model
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There are two stocks, A and B, both trading at price $20. Consider a one-period binomial model in which stock A’s price can go to either of {35, 5}. Stock B’s price can take one of the following values after one period: {36, 18}. An investment in $1.00 of bonds at the start of the period delivers a risk-free value at the end of the period of $1.10.
(a) Using replication, find the prices of call options on both stocks A and B if the calls have a strike of $20.
(b) Which call is worth more, that on stock A or on stock B? Why?
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This is a problem in the context of financial derivatives specifically binomial option pricing a To find the price of a call option on both stocks A a...View the full answer
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