In a financial market a stock is traded with a current price of 50. Next period the price of the stock can either go up with 30 per cent or go down with 25 per cent. Risk-free debt is available with an interest rate of 8 per cent. Also traded are European options on the stock with an exercise price of 45 and a time to maturity of 1, i.e. they mature next period. i) Find prices of Arrow-Debreu securities. ii) Calculate the price of a call option by constructing and pricing a replicating portfolio.

Essentials Of Investments
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Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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In a financial market a stock is traded with a current price of 50. Next period the price
of the stock can either go up with 30 per cent or go down with 25 per cent. Risk-free
debt is available with an interest rate of 8 per cent. Also traded are European options
on the stock with an exercise price of 45 and a time to maturity of 1, i.e. they mature
next period.
i) Find prices of Arrow-Debreu securities.
ii) Calculate the price of a call option by constructing and pricing a
replicating portfolio.

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