Consider a two-period two-state world let the current stock

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Consider a two-period, two-state world. Let the current stock price be $35 and the risk-free rate be 5%. In each period, the stock price can either go up by 10% or down by 10%. A call option expiring at the end of the second period has an exercise price of $30.

Find the stock price sequence.

  • Determine the possible prices of the call at expiration.
  • Find the possible prices of the call at the end of the first period.
  • What is the current price of the call?
  • What is the initial hedge ratio?

Reference no: EM13391037

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