1. [1 point] Which of the following is/are NOT true? (a) Risk-neutral valuation and no-arbitrage arguments give the same option prices. (b) Risk-neutral valuation involves assuming that the expected return is the risk-free rate and then discounting expected payoffs at the risk-free rate. (c) A hedge set up to value an option does not need to be changed. (d) All of the above 2. [2 points) Assume Nadia just sold some call options which expire in 1 year. The strike price on the calls is $42.50. The current underlying share price is $36 per share. It is expected that if the stock does will over the next year, the price could climb to $50 per share; however, if the firm is adversely affected due to changing market conditions, the share price could drop to $30 per share. The risk- free rate is 1096. (a) What is the appropriate hedge ratio to create a riskless portfolio? (b) What position should be taken in the hedge asset? (c) What is the value of the call option today? 3. [3 points] Assume Ryan is analyzing some put options with a strike of $25 which are available on a stock currently priced at $28.75 per share. The options available expire in one year. The risk-free rate of return is 10%. The share price may increase to $40 or may fall to $15, depending upon market conditions, determine: (a) the value of the put options Ryan is considering buying, (b) the value of an identical call option on the stock, assuming put-call parity holds. 4. [4 points] The current price of a nondividend paying stock is $80. Use a two-step binominal model to evaluate a put option on the stock. The put option has a strike price of $90 and the put expires in 12 months (each step is 6 months). Assume a risk-free rate of 6%. The projected prices are noted below. Suu = $105.80 Su = $92 So = 580 Sdu = Sud = 578 20 Sd = $68 d=557.50