Question
The stock price of Epik Corp. can be described by a one-period binomial model and its current price is 0=$850. In one period (=1), the
The stock price of Epik Corp. can be described by a one-period binomial model and its current price is 0=$850. In one period (=1), the price of Epik stock can increase by a factor =1.4 and become $1190. Alternatively, it can decrease by a factor =0.85 and become $722.5. You observe that a European call option on Epik stock with a strike price of $816 and one period until maturity is traded at a price of $151.32. If you dont have any capital but can borrow risk-free up to $14000 (to form a replicating portfolio), what is the maximum riskless profit you can make at =0? Assume that the risk-free rate is 3.41%.
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