Statement of a problem № m40413


A stock currently sells for $110 per share. Let the price of the stock at the end of a one year period be X, which will take one of the values $100 or $300. Suppose that you have the option to buy shares of this stock at $150 per share at the end of that one-year period. Suppose that money could earn 5.8% risk-free over that one-year period. Find the risk-neutral price for the option to buy one share.

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