Question: In a most simplified world, we suppose there are two states of the economy in one year. The returns on stock ABC and on the

In a most simplified world, we suppose there are two states of the economy in one year. The returns on stock ABC and on the market are as given below. Stock ABC is currently traded at $40. Assume the CAPM holds.

Probability Stock ABC Market

Boom 0.5 0.35 0.20

Recession 0.5 0.15 0.05

i) Suppose that you want to write a oneyear call option on stock ABC with exercise price equal to $48. How much is the call option worth?

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