Suppose that a stock price starts at $800 at time 0. At time 1 (one day...

 

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Suppose that a stock price starts at $800 at time 0. At time 1 (one day later), the stock will either be worth $850 or $650. If the stock is worth $850 at time 1, then the stock will either be worth $1000 or $800 at time 2. And If the stock is worth $650 at time 1, then the stock will either be worth $750 or $200 at time 2. Consider a European call option with strike price $400 and expiry time 2. Suppose the stock price at time 1 is $650 and you plan on offering the above European call option to the people in financial market. What is the fair price that you should charge based on "Fair Market (No-Arbitrage)" principle? Suppose that a stock price starts at $800 at time 0. At time 1 (one day later), the stock will either be worth $850 or $650. If the stock is worth $850 at time 1, then the stock will either be worth $1000 or $800 at time 2. And If the stock is worth $650 at time 1, then the stock will either be worth $750 or $200 at time 2. Consider a European call option with strike price $400 and expiry time 2. Suppose the stock price at time 1 is $650 and you plan on offering the above European call option to the people in financial market. What is the fair price that you should charge based on "Fair Market (No-Arbitrage)" principle?

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To determine the fair price of the European call option based on the Fair Market NoArbitrage princip... View the full answer