A share of DoublePlay.com is selling at $100. You forecast that this value can either go up to $200 or drop to $50 tomorrow. You want to verify whether a put option with strike price $125 is fairly priced. Assume that the risk-free rate is 8%.

2a) If you buy one share of stock, what position should you take in the put option(s) to construct a perfectly hedged portfolio?

• Long
• Short

2b) How many put options would you buy or sell to construct a perfectly hedged portfolio, assuming that you are long one share of stock?

• 1
• 2
• 3
• 4

2c) What is the present value of your perfectly hedged portfolio?

• $126.19
• $159.99
• $185.18
• $1 trillion

2d) What is the put price that would rule out arbitrage opportunities?

• $42.59
• $45.51
• $62.22
• $2 billion

2e) Assume that DoublePlay.com does not pay dividends. What is the price of a call option with strike price $125 (Hint: use the call-put parity)?

• $26.85
• $34.14
• $44.93
• $51.22