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Suppose that the current price of a stock is $120 per share with volatility σ = 50% per annum. Suppose further that the risk-free interest rate is 7% per annum and the stock pays no dividend.
(a) What is the price of a European call option contingent on the stock with a strike price of $125 that will expire in 3 months?
(b) What is the price of a European put option on the same stock with a strike price of $118 that will expire in 3 months? If the volatility σ is increased to 80% per annum, then what are the prices of the two options?
Describe five different investment strategies. Which of these investment strategies do you personally favor? Why? What types of investments fit best with your strategy?
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