Solved: What is the value of a two-month derivative, Finance Basics

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What is the value of a two-month derivative

Question:

A stock is currently $25. It is known that at the end of 2 months it will be either $23 or $27. The risk-free interest rate is 10% per annum with continuous compounding. What is the value of a 2-month derivative that will be either 529 (if the stock price is 23) or 729 (if the stock price is 27)? Use no-arbitrage arguments. Consider a portfolio of:

+delta : shares
-1: derivative

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Finance Basics: What is the value of a two-month derivative

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