Question
We will derive a two-state put option value in this problem. Data: S 0 = 120; X = 130; 1 + r = 1.1. The
| We will derive a two-state put option value in this problem. Data: S0 = 120; X = 130; 1 + r = 1.1. The two possibilities for ST are 140 and 90. |
| a. | The range of S is 50 while that of P is 10 across the two states. What is the hedge ratio of the call? (Round your answer to 2 decimal places.) |
| Hedge ratio | .2 |
| b. | Calculate the value of a call option on the stock with an exercise price of 130. (Do not use continuous compounding to calculate the present value of X in this example, because the interest rate is quoted as an effective per-period rate.) (Do not round intermediate calculations. Round your answer to 2 decimal places. ) |
| Call value | $ |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Calculus For Business, Economics And The Social And Life Sciences
Authors: Laurence Hoffmann, Gerald Bradley, David Sobecki, Michael Price
11th Brief Edition
978-0073532387, 007353238X
