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Explain the principle of risk-neutral valuation

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1. Explain the principle of risk-neutral valuation.

2. Calculate the price of a 3-month European put option on a non-dividend-paying stock with a strike price of $50 when the current stock price is $50, the risk-free interest rate is 10% per annum, and the volatility is 30% per annum.

3. What difference does it make to your calculations in Problem 15.4 if a dividend of $1.50 is expected in 2 months?

Reference no: EM133074010

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