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A company is currently awaiting the outcome of a major lawsuit. This is expected to be known within one month. The stock price is currently $20. If the outcome is positive, the stock price is expected to be $25 at the end of one month. If the outcome is negative, it is expected to be $16 at that time. The one-month riskfree interest rate is 8% per annum.
a. What is the risk-neutral probability of a positive outcome?
b. What are the values of one-month call options with strike prices of $18, $20, $22, and $24?
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