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Replication portfolio to prevent arbitrage

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Reference no: EM131773915

Suppose that we have a stock with a price of $60 today and that in one year, the price will be either $90 or $30. The risk-free rate is 10%. Consider the payoffs to a call option with a strike price of $60. what is the value of the call option?(Hint: construct a portfolio with the stock and the risk-free bond to replicate the payoff structure of the call option. The value of the call option today must be equivalent to the value of the replication portfolio to prevent arbitrage.

Reference no: EM131773915

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