Question: Outline the key idea underpinning the no arbitrage pricing method used to value derivatives. b) Use the one period riskless hedge to illustrate the principles

  1. Outline the key idea underpinning the no arbitrage pricing method used to value derivatives.

  2. b) Use the one period riskless hedge to illustrate the principles articulated in part a). Consider a

    stock priced at $40 that will move +/- 10% over the next 6 months. Assume a call option with a strike of $40 and a continuously compounded risk free rate of 6% p.a.

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