Demonstrate that the return is same as the risk-free rate

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Reference no: EM13721832

Find the value of American Call option with an exercise price of $150 and a stock price of $145. The stock can go up by 12% and down by 18% in each of the two binomial periods. The risk free rate is 3%. Determine the price of option today using two period binomial option pricing model. Then construct a risk-free hedge of long stock and short option. Also demonstrate that the return is same as the risk-free rate.

Reference no: EM13721832

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