Hi,

there are no numbers here, I just need to know the explanation of how to solve these questions.

1. The following is a Binomial Option Pricing Model question. There will be parts to this question asked about it.

a. What are the values of the calls at maturity, t=2?

b. What are the values of the calls at t =1?

c. What is the initial (t = 0) fair market price of the call?

d. What is the initial (t = 0) hedge ratio?

e. What are the hedge ratios at t = 1?

f. If one call was written initially, what is the value of the hedged portfolio one period later (t = 1)?

g. If the stock moves down in period 1 how would you adjust your t = 0 hedge by trading only stock?