Stock and bond position would replicate payoffs of option

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Assume that a stock can move up by 15% or down by 15%. Assume that the current share price is $100 and that there is a call option on the stock with a strike price of $95. The periodic risk-free interest rate is 6%. What stock and bond position would replicate the payoffs of the option?

a. buying 2/3 shares of stock and borrowing $53.46 at the risk-free rate

b. buying 2/3 shares of stock and borrowing $56.67 at the risk-free rate

c. buying 2/3 shares of stock and lending $56.67 at the risk-free rate

d. buying 2/3 shares of stock and lending $53.46 at the risk-free rate

e. selling one share of stock and lending $95 at the risk-free rate

Reference no: EM131350597

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