Question

In: Finance

Imagine that google's stock price will either rise by one-third or fall by 25% over the...

Imagine that google's stock price will either rise by one-third or fall by 25% over the next six months. Assume the 6 month risk-free interest rate is 1%. Both the stock price and the exercise price are $530.

1. Calculate the value of the 6 month call option using the replicating portfolio method.

2. Calculate the value of the 6 month call option using the risk-neutral method.

Solutions

Expert Solution

The answer is $78 under both the methods.


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