A market currently consists of a risky $100 stock and $120 risk-free bond. Suppose that, in 2
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A market currently consists of a risky $100 stock and $120 risk-free bond. Suppose that, in 2 months, there\'s a 70% chance that the stock\'s price will be $115 or $75 otherwise, and the bond will be worth $132.00. Consider a contract with maturity T = 2 months that pays $10 if the stock price decreases and $90 if the stock goes up.
Find a portfolio replicating the contract and state:
(a) The number of:
(i) stock shares in the replicating portfolio = to 2 decimal places
(ii) bond units in the replicating portfolio = to 2 decimal places
(b) The initial value of the replicating portfolio.
(c) The expected maturity (or terminal) value of the replicating portfolio .
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