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European Call Option: Call inequity

Please see the attached file for problem description.


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Let's consider the portfolios mentioned in the hint.

Portfolio 1: Purchase a call.
The cost of this portfolio is C(S, T) (the price of the call). Notice that S is the current price of the stock.

The value of this portfolio at time T (when the call expires) will simply be max(0, S(T) - K), where S(T) is the price of the stock at time T.

Portfolio 2: Purchase one stock, sell one bond
The net cost of this ...

Solution Summary

Logic/reasoning and computations shown for you.