Question
The price of ULL stock is currently $110. The stock will either increase by a factor of u=1.2 or decrease by a factor of d=0.6
The price of ULL stock is currently $110. The stock will either increase by a factor of u=1.2 or decrease by a factor of d=0.6 in the following year. The annual risk-free rate is 3% and the stock does not pay dividends.
Consider a European call option, C1, written on ULL stock with a strike price of $66 that matures in one year.
A. Suppose that an investor wants to create a portfolio today that generates the same payoffs in both states of the world in 1 year, using ULL stocks and the call option C1. Calculate the number of ULL stocks that an investor should purchase for each call option C1 that he sells.
B. What is the price of the call option C1 today?
Step by Step Solution
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Step: 1
A To create a portfolio that generates the same payoffs in both states of the world stock increase and stock decrease we need to determine the number ...
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Intermediate Financial Management
Authors: Eugene F Brigham, Phillip R Daves
14th Edition
0357516664, 978-0357516669
