arbvalue - c = 56/9 Using Arbitrage method to Value a Call...

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n Step 1 Arbitrage value long x shares of stock of call option short 1 call risk-free if 50x-10=32x x=5/9 Step 2 risk-free portfolio c = call price today must earn risk-free rate value in one period=32(5/9)=160/9 so value today= (1/(1+r)*value in one period (5/9)*40-c=(1/(1+(1/9))*(160/9) 200/9-c =16
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Unformatted text preview: c = 56/9 Using Arbitrage method to Value a Call with exercise price of $40 11 1/9% risk free rate 1 period later Stock value Call Value today up $50 $10 $40 down $32 $0 A B C D E F G H I J K 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22...
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