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We will derive a two state call option value in this problem Data S0 110 X 120 1 r 11 The two possibilities for ST are 140 and 100 a The range of S is 40 while that of C is 20 across

We will derive a two-state call option value in this problem. Data: S0 = 110; X = 120; 1 + r = 1.1. The two possibilities for ST are 140 and 100.

a. The range of S is 40 while that of C is 20 across the two states. What is the hedge ratio of the call? (Round your answer to 2 decimal places.)

Hedge ratio

b. Calculate the value of a call option on the stock with an exercise price of 120. (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            $

 

Apr 09 2020 View more View Less

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