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The current price of a share of NOP Companys stock is $55. A call option for this stock permits the holder to purchase one share
The current price of a share of NOP Companys stock is $55. A call option for this stock permits the holder to purchase one share at an exercise price of $60. These options will expire at the end of 1 year, at which time NOPs stock will be selling at one of two prices, $50 or $70. The risk-free rate is 6%. You have been asked to perform the following tasks to arrive at value of the firm's call options.
- Explain how you create a riskless hedged investment.
- What will be the value of this portfolio in one year?
- Whatisthecostofthestockintherisklessportfolio?
- What is the present value in the riskless portfolio?
- Whatisthevalueofthefirm'scalloption?
- What assumptions in this analysis might not hold in the real world?
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