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FIN 4 0 5 Please do not copy and paste. I want a unique answer Please use the keyboard to answer Please avoid plagiarism A
FIN
Please do not copy and paste. I want a unique answer
Please use the keyboard to answer
Please avoid plagiarism
A stock worth $ that can go up or down by percent per period. The riskfree rate is percent. Use one binomial period.
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 $
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 riskfree rate regardless 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 $ when the hedge is initiated.
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