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A stock price is currently $40. It is known that at the end of three months it will be either $45 or $35. The risk-free rate of interest with
A stock price is currently $40. It is known that at the end of three months it will be either $45 or $35. The risk-free rate of interest with quarterly compounding is 8% per annum. Calculate the value of a three-month European put option on the stock with an exercise price of $40. Verify that no-arbitrage arguments and risk-neutral valuation arguments give the same answers.
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