Answer to Question #98059 in Finance for BRIAN

Answer to Question #98059 in Finance for BRIAN

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Question #98059

consider a financial market place with money account, a stoke and a european call optionon the stock with strike price of ksh.196. suppose there are two future states. if state 1 realizes, the stock price decline to ksh 168 from the current price of 200. if state 2 happens the stoke price rises to 224. suppose the interest rate on the money account is 5% no matter the state and assuming that the payoffs on the stock and money account are the stock prices and componded money value respectively in different date 1 states.
a). At what price should we price the call option to avoid arbitrage?
b). Would there be an arbitrage if the price were 15 or 25.

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