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A stock is currently priced at $25. In 6 months it will either be $26 or $30. The risk-free rate is 12% per annum with continuous compounding.
Verify the assumption on u and d given the following theorem:
Theorem: If the market has no arbitrage opportunities, then the price of any derivative that can be replicated with traded assets such as stock and cash, is the discounted expected payoff of the derivative in the risk-neutral world.
Could someone please explain an answer for this problem?
A chooser option is similar to what other type of option strategy
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