Consider a European call with an exercise price of 50 on a stock priced at 60. The

Question:

Consider a European call with an exercise price of 50 on a stock priced at 60. The stock can go up by 15 percent or down by 20 percent in each of two binomial periods. The risk-free rate is 10 percent. Determine the price of the option today. Then construct a risk-free hedge of long stock and short option. At each point in the binomial tree, show the composition and value of the hedge and demonstrate that the return is the same as the risk-free rate. On any revisions to the hedge make the transactions (buying or selling) in stock and not options. You can borrow any additional funds required at the risk-free rate, and any excess funds should be invested at the risk-free rate?
Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...