The price of a share of ABC stock is currently $100. It is known that at the end of 6 months, the ABC share price will be either $120 or $84. The riskless interest rate is 5% per year.

1. (20 points) Calculate the price of a six-month European call option on ABC stock with an exercise price of $96 by applying the delta hedging approach.

2. (20 points) Calculate the price of a six-month European call option on ABC stock with an exercise price of $96 by applying the replicating portfolio approach.

3. (20 points) Calculate the price of a six-month European call option on ABC stock with an exercise price of $96 by applying the risk neutral valuation approach.

4. (10 points) What is the price for a six-month European put option on ABC stock with an exercise price of $96?

5. (30 points) Next, add another 6 month timestep; i.e., it is known that at the end of 1 year, the ABC share price will be $144, $100.80, or $70.56. Calculate the price of a 1 year European call option on ABC stock with an exercise price of $96. Also calculate the price of a 1 year European put option on ABC stock with an exercise price of $96.

Baylor University Hankamer School of Business Department of Finance, Insurance & Real Estate Problem Set #8 Dr. Garven Name: The price of a share of ABC stock is currently $100. It is known that at the end of 6 months, the ABC share price will be either $120 or $84. The riskless interest rate is 5% per year. 1. (20 points) Calculate the price of a six-month European call option on ABC stock with an exercise price of $96 by applying the delta hedging approach. 2. (20 points) Calculate the price of a six-month European call option on ABC stock with an exercise price of $96 by applying the replicating portfolio approach. 3. (20 points) Calculate the price of a six-month European call option on ABC stock with an exercise price of $96 by applying the risk neutral valuation approach. 4. (10 points) What is the price for a six-month European put option on ABC stock with an exercise price of $96? 5. (30 points) Next, add another 6 month timestep; i.e., it is known that at the end of 1 year, the ABC share price will be $144, $100.80, or $70.56. Calculate the price of a 1 year European call option on ABC stock with an exercise price of $96. Also calculate the price of a 1 year European put option on ABC stock with an exercise price of $96