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Consider a stock currently priced at $80. In the next period, the stock can either increase by

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Consider a stock currently priced at $80. In the next period, the stock can either increase by 30 percent or decrease by 15 percent. Assume a call option with an exercise price of $80 and a risk-free rate of 6 percent. Suppose the call option is currently trading at $12. If the option is mispriced, what amount of riskless return can be earned using a riskless hedge?
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We are given S 80 X 80 u 130 d 085 and r 006 In order to find the amount of riskless return that can ...View the full answer


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Sumit kumar
Education details: QUATERNARY Pursuing M.Tech.(2017-2019) in Electronics and Communication Engg. (VLSI DESIGN) from GNIOT Greater Noida TERTIARY B.Tech. (2012-2016) in Electronics and Communication Engg. from GLBITM Greater Noida SECONDARY Senior Secondary School Examination (Class XII) in 2012 from R.S.S.Inter College, Noida ELEMENTARY Secondary School Examination (Class X) in 2010 from New R.J.C. Public School ,Noida CERTIFICATION Summer Training in ‘WIRELESS EMBEDDED SYSTEM’ from ‘XIONEE’ for the six weeks. EMBEDDED SYSTEM Certificate issued by CETPA INFOTECH for one day workshop. Certificate of Faculty development program on OPTICAL COMMUNICATION and NETWORKS for one week.
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A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.

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