Question: Consider a ONE - PERIOD call option on 1 0 0 shares of a $ 5 0 . 0 0 stock. In the next period

Consider a ONE

-

PERIOD call option on

100

shares of a $

50.00

stock. In the next period the stock can go up

25 %

to $

62.50

per share or fall by

20 %

to $

40

per share. The risk

-

free rate is

5

percent per period. The strike price is $

49.00

per share.

If you wanted to replicate the payoffs of this call option with forward contracts on the stock, which of these portfolios will replicate the payoffs of the call?

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