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Consider a stock currently priced at $40. In the next period, the stock can either...

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Consider a stock currently priced at $40. In the next period, the stock can either increase by 20 percent or decrease by 10 percent. Assume a call option with an exercise price of $40 and a risk- free rate of 6 percent. (a) What is the theoretical value of the call for the stock according to one-period binomial model? (3 marks) Suppose the call option is currently trading at $5. If the option is mispriced, what amount of riskless return can be earned using a riskless hedge? (b) Consider a stock currently priced at $40. In the next period, the stock can either increase by 20 percent or decrease by 10 percent. Assume a call option with an exercise price of $40 and a risk- free rate of 6 percent. (a) What is the theoretical value of the call for the stock according to one-period binomial model? (3 marks) Suppose the call option is currently trading at $5. If the option is mispriced, what amount of riskless return can be earned using a riskless hedge? (b)

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