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What is the price of the derivative

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Reference no: EM132423116

Problem:

Binomial Tree Pricing

A stock price is currently $25. It is known that at the end of two months it will be either $27 or $23. The risk-free interest rate is 10% per annum with continuous compounding. Suppose STrepresents the stock price at the end of two months.

Required:

Question 1: The payoff of a new type of derivative is ST2 (i.e., stock price at time T squared) at the end of two months. What are the two possible payoffs?

Question 2: What is the price of the derivative in (a). Solve by forming a risk-less portfolio. Round to one decimal place.

Question 3: What is the price of the derivative in (a). Solve using risk-neutral probabilities. Round to one decimal place.

Reference no: EM132423116

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