1.The current stock price of a non-dividend-paying stock is $87. The risk-free rate is 2% per annum with continuous compounding.

In 6 months, the stock price could be either $90 or $85.

Consider a European call option with a strike price of $86 that expires in six months.

If the stock price goes up, the payoff of the call option at expiration will be [ Select ] ["$5", "$0", "$1", "$4"] .

If the stock price goes down, the payoff of the call option at expiration will be [ Select ] ["$1", "$4", "$0", "$5"] .

2.In the problem above, what is the delta hedge ratio (i.e. how many shares of the stock should you long for every 1 call option that you are short in order to make the payoff of the portfolio riskless)?

3.In the problem above, what is the risk-neutral probability of an up move?

a.

50%

b.

35.6%

c.

23.7%

d.57.5%

4. In the problem above, what is the value of the call option today?