1. A stock is trading at $50. An investor wants you to design her a portfolio whose value after one year will depend on the price of the stock at that time as shown in the figure below. Don't ask why she wants such a portfolio. How can you structure such a portfolio for her? How much will it cost her? Use a spreadsheet for Black-Scholes pricing. Assume that the stock does not pay dividend and its volatility is 40%. The risk-free rate is 5% per annum with continuous compounding. Ignore transaction costs and you will not charge her for your time as you have nothing better to do.

A stock is trading at $50. An investor wants you to design her a portfolio whose value after one year will depend on the price of the stock at that time as shown in the gure below. Don't ask why she wants such a portfolio. How can you structure such a portfolio for her? How much will it cost her? Use a spreadsheet for Black-Scholes pricing. Assume that the stock does not pay dividend and its volatility is 40%. The risk-free rate is 5% per annum with continuous compounding. Ignore transaction costs and you will not charge her for your time as you have nothing better to do. "I" - demo 30." ' 0.50 msu 90.50 1:15.50 Portfolio Value 10 ID