You are evaluating a stock that is currently selling for R30 per share. Over the investment period you think that the stock price might get as low as R25 or as high as R40. There is a call option available on the stock with an exercise price of R35.

a. How many call options will you combine with the stock to construct the perfect hedge? Will you buy the calls or sell the calls ?

b. Calculate the value of one call option now.