Discussion- Assume Mike Inc.'s stock price changes at every month: Let's take a simple world: the stock
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Discussion- Assume Mike Inc.'s stock price changes at every month: Let's take a simple world: the stock price can either increase by 30% or falls by 20% every month. Its price now is $50. The interest rate is 6% per year (or equivalently, 6%/12 = 0.5% per month). Please answer following questions:
- What is the value of a one-month call option with an exercise price of $50?
- What is the option delta?
- Show how the payoffs of this call option can be replicated by buying Mike's stock and borrowing.
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