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Problem 1 6 - 9 ( Algo ) We will derive a two - state call option value in this problem. Data: s 0 =

Problem 16-9(Algo)
We will derive a two-state call option value in this problem. Data: s0=$210;x=$220;1+r=1.10. The two possibilities for sT are $250
and $130. The portfolio consists of 1 share of stock and 4 calls short.
Required:
a. The range of S is $120 while that of C is $30 across the two states. What is the hedge ratio of the call? (Round your answer to 2
decimal places.)
Answer is complete and correct.
Hedge ratio
0.25
b. Calculate the value of a call option on the stock with an exercise price of $220.(Do not use continuous compounding to calculate
the present value of x in this example, because the interest rate is quoted as an effective per-period rate.)(Do not round intermediate
calculations. Round your answer to 2 decimal places.)
Answer is complete but not entirely correct.
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