Question: The continuously compounded interest rate is r = 10%. A stock sells for $50 today. Assume that next period (one year) the stock will either:

The continuously compounded interest rate is r = 10%. A stock sells for $50 today. Assume that next period (one year) the stock will either:

go up by 30% (to $65) with probability p = 70%;

go down by 20% (to $40) with probability 1 p = 30%.

(a) What is the one-year forward price for the stock?

(b) What is the replicating portfolio for this futures contract?

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