Suppose a stock is currently selling at S0 = 50. In one period, the stock price is equally likely to be 60 and 40. We would like to price a call option with an exercise price of 55 that expires in one period. The risk-free interest rate is r = 0.05.

(a) [5pts] What is the hedge ratio of the call?

(b) [5pts] Form a hedged portfolio that consists of one share of stock and has (nonrandom) payoff in one period. What is the (nonrandom) payoff to this portfolio in one period?

(c) [5pts] What is the present value of this hedged portfolio?

(d) [5pts] Solve for the value of the call. (e) [5pts] Use the put-call parity theorem to calculate the price of the put with the same exercise price and expiration date.