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What are the risk-neutral probabilities

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A stock is currently selling at £100. A call option on the stock has an exercise price of £120. The option expires in 3 months' time. Prices for the stock could go up to £140 or down to £90. The risk-free rate is 5% per annum.

(i) What are the payoffs in the two states for a corresponding put option?

(ii) What are the risk-neutral probabilities?

(iii) What is the value of the put option?

Reference no: EM133126204

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