Consider a stock worth

$25

that can go up or down by 15 percent per period. The risk- free rate is 10 percent. Use one binomial period. Assume the stock pays no dividends.\ a. Determine the two possible stock prices for the next period.\ b. Determine the intrinsic values at expiration of a European call option with an exercise price of

$25

.\ c. Find the value of the option today.\ d. Construct a hedge by combining a position in stock with a position in the call. Show that the return on the hedge is the risk- free rate regard-less of the outcome, assuming that the call sells for the value you obtained in part

c

.\ e. Determine the rate of return from a riskless hedge if the call is selling for

$3.50

when the

1. Consider a stock worth $25 that can go up or down by 15 percent per period. The risk-free rate is 10 percent. Use one binomial period. Assume the stock pays no dividends. a. Determine the two possible stock prices for the next period. b. Determine the intrinsic values at expiration of a European call option with an exercise price of $25. c. Find the value of the option today. d. Construct a hedge by combining a position in stock with a position in the call. Show that the return on the hedge is the risk- free rate regard-less of the outcome, assuming that the call sells for the value you obtained in part c. e. Determine the rate of return from a riskless hedge if the call is selling for $3.50 when the