What is the current price of the call

Reference no: EM131291141

Consider a two-period, two-state world. Let the current stock price be 45 and the risk-free rate be5 percent. Each period the stock price can go either up by 10 percent or down by 10 percent. A call option expiring at the end of the second period has an exercise price of 40.

a. Find the stock price sequence.

b. Determine the possible prices of the call at expiration. Find the possible prices of the call at the end of the first period.

d. What is the current price of the call?

e. What is the initial hedge ratio? f. What are the two possible hedge ratios at the end of the first period?

g. Construct an example showing that the hedge works. Make sure the example illustrates how the hedge portfolio earns the risk-free rate over both periods.

h. What would an investor do if the call were overpriced? If it were underpriced?

Reference no: EM131291141

Questions Cloud

Why are the up and down parameters adjusted : What is the difference in these two examples, and why did we adjust the parameters in one case and not in the other?

Marketing to various consumer groups : What motivates consumers to make the decisions they do? How do health care organizations market to specific groups of consumers? In this Discussion, you will explore these questions and the connection between them.

Determine the two possible stock prices for the next period : Construct a hedge by combining a position in stock with a position in the call. Show that the return on the hedge is the risk-free rate regardless of the outcome, assuming that the call sells for the value you obtained in part c.

Implementation of the program : What were the issues that led to the implementation of the program? Describe the program. How will the implementation of the program resolve the issues mentioned in the first question?

What is the current price of the call : Determine the possible prices of the call at expiration. Find the possible prices of the call at the end of the first period.

Problem regarding the university accessibility guidelines : Why is it important that faculty comply with the University's Accessibility Guidelines?

Find the value of the call : Consider the following binomial option pricing problem involving an American call. This call has two periods to go before expiring. Its stock pr=is 0.90. The stock pays a dividend at the end of the first period at the rate of 0.06. Find the value ..

Capacity growth exceeding demand : "Two of the Nation's Biggest Airlines Challenged by Capacity Growth Exceeding Demand" Please provide a comparison between Delta and American Airlines regarding concerns of capacity growth exceeding demand.

What will be the price and quantity : Economics 5321 - What is the optimal two part tariff when only high demand consumers purchase the good and What will be the price and quantity if the monopolist decided to act as a perfect competitor?

User Account

All Pages