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Tthe current price of a stock is S=20. It is known that at the end of 6 months the stock will be either Su= 24 or Sd=18.
1.Compute the risk neutral price of the call option with the strike price E= 21 and r = 5%.
2. Show that there exists arbitrage if the price of the call option is below the risk-neutral price. Consider a particular example- the price of the Call option with the above
parameters is C= 0.75. Show details for the abitrage (buy the call option and short sell delta shares). Show detailed computations for the arbitrage for S(T) = 18 and S(T)= 24.