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1. You are an options dealer. Given a binomial model for stock prices, you sell call options where Number So Su Sd X of shares

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1. You are an options dealer. Given a binomial model for stock prices, you sell call options where Number So Su Sd X of shares N 60 40 55 0.05 1 1000 (a) Calculate the fair market price for the call option. (b) Assume you sell 1000 shares of the option for the fair market price +$0.10. How many shares of stock should you buy to hedge the sale? (c) What is your profit, independent of the outcome of the stock price? 50 1. You are an options dealer. Given a binomial model for stock prices, you sell call options where Number So Su Sd X of shares N 60 40 55 0.05 1 1000 (a) Calculate the fair market price for the call option. (b) Assume you sell 1000 shares of the option for the fair market price +$0.10. How many shares of stock should you buy to hedge the sale? (c) What is your profit, independent of the outcome of the stock price? 50

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