Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

One share of equity in Mullen Inc. is currently trading at $ 4 9 per share. In one year, the price is expected to (

One share of equity in Mullen Inc. is currently trading at $49 per share. In one year, the price is expected to (1) rise to $65, or (2) fall to $40. You are interested in a call option on Mullen, Inc. The option hasfa strike price of $55 and expires in 1 year. The current risk-free rate for the year is 3%. As you can calculate, the binomial price for this option is about $4.07. However, an options trader is quoting a price of $4.50 to buy or sell the option. And you know how to arbitrage this.
You take a long position in the replicating portfolio, by purchasing q, shares of Mullen, Inc. and borrowing $15.53, and you short (sell) the option for $4.50.
How many shares of Mullen, Inc. did you purchase?
Enter your answer in decimal format to 2 decimal places. For example, if your answer is 0.5722, enter "0.57".
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Finance

Authors: Maurice D Levi

5th Edition

0415774594, 9780415774598

More Books

Students also viewed these Finance questions

Question

is particularly relevant to these issues.)

Answered: 1 week ago