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Question: a nondividend paying stock is currently selling for 40 the...

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G3. A non-dividend paying stock is currently selling for $40. The stocks volatility is 20%. You observe in the market that the plain vanilla European calls and puts on this stock with strike $42 and maturity 3 months are being traded. Using the Black-Scholes formula, describe precisely the replicating portfolio strategy for the straddle (using only the underlying stock and cash). The continuously compounded risk-free interest rate is 5%.

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