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An investment bank is offering a security linked to the

Question: An investment bank is offering a security linked to the price 2 years from today of Bisco stock, which is currently at $3 per share. Denote Bisco ' s stock price in two periods by S2. The security being offered pays off max(S^2/3 - 40 0). You estimate that in each of the next two periods, Bisco stock will either increase by 50% or decrease by 20%. The annual interest rate is 8%. Price the security.

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