1. a. If, in a two-state model, a stock can take a price of 144 or 108, what would be the hedge ratio for each of the following prices: $144, $140, $130, $108? (Leave no cells blank - be certain to enter "0" wherever required. Round your answers to 2 decimal places.)

X Hedge Ratio

$ 144 $

140 $

130 $

108

1 b. What do you conclude about the hedge ratio as the option becomes progressively more in the money? Increases to a maximum of 1.0 Decreases to a minimum of 0

We will derive a two-state call option value in this problem. Data: S₀ = 140; X = 150; 1 + r = 1.1. The two possibilities for S_T are 170 and 70.

2 a. The range of S is 100 while that of C is 20 across the two states. What is the hedge ratio of the call? (Round your answer to 2 decimal places.)

Hedge ratio

2b. Calculate the value of a call option on the stock with an exercise price of 150. (Do not use continuous compounding to calculate the present value of X in this example, because the interest rate is quoted as an effective per-period rate.) (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Call value $