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There exist European call and put options on ROI with an exercise price of $60...

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Finance

There exist European call and put options on ROI with an exercise price of $60 and TWO MONTHS to expiration. ROI current share price is $60. ROI will not pay any dividends over the life of the options. You estimate that the up and down factors for ROI are u = 1.171 and d = 0.854 EACH MONTH. The riskless interest rate is 0.15% per month. Assume that the time to expiration is divided into two equal periods of onemonth. FOR BOTH PUT AND CALL OPTIONS:

a) Create the possible riskless portfolios FOR NEXT MONTH and show that they are riskless. Calculate the possible equilibrium prices FOR NEXT MONTH.

b) Create the riskless portfolio TODAY and show that it is riskless. Calculate the equilibrium price TODAY.

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