Over the coming year Chance Manufacturing's stock price will halve to $50 from its current level of

Question:

Over the coming year Chance Manufacturing's stock price will halve to $50 from its current level of $100, or it will rise to $200. The 1-year interest rate is 10%.

a. What is the delta of a 1-year call option on Chance stock with an exercise price of $100?

b. Create a table showing the cash flows from an investment in the stock and borrowing to replicate the option's cash flows. Use Table 25.2. Explain what you have done.

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c. What is the price of the call option?

d. Use value of the call option formula and Example 25A.1 to calculate the price of the call option.

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