3. Introduction to option pricing models

Spade and Archer Inc. stock is currently selling for $89.71 per share. Options permit the holder to buy one share at an exercise price of $65.00. These options will expire at the end of one year. When the option expires, Spade and Archer Inc.s stock will either be selling for $85.00 or $45.00. The range of Spade and Archer Inc.s ending stock prices is .

In contrast, the range of Spade and Archer Inc.s ending option payoffs is .

To construct a hedged portfolio, the investors goal is to have the portfolio payoff be the same if the stock goes up or down. Suppose Emily is planning on writing one call option, how many shares of stock should she buy to set up the hedge?

0.50 shares

0.60 shares

0.70 shares

0.45 shares

0.35 shares

If the investor decides to go forward with creating this riskless hedge, the net payoff will be .

What will be the equilibrium price of the call option if the risk-free rate is 7%?

$25.02

$19.06

$23.83

$21.45

$27.40