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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 Algo
We will derive a twostate call option value in this problem. Data: $;$; The two possibilities for are $
and $ The portfolio consists of share of stock and calls short.
Required:
a The range of is $ while that of is $ across the two states. What is the hedge ratio of the call? Round your answer to
decimal places.
Answer is complete and correct.
Hedge ratio
b Calculate the value of a call option on the stock with an exercise price of $Do not use continuous compounding to calculate
the present value of in this example, because the interest rate is quoted as an effective perperiod rate.Do not round intermediate
calculations. Round your answer to decimal places.
Answer is complete but not entirely correct.
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