QBV, a non-dividend-paying stock, is currently trading for $100 a share. There is a 25-percent chance that the stock will trade for $85 in one year, and a 75-percent chance that the price will increase to $135. The risk-free rate is 5 percent per year. All options expire in one year. You would like to purchase a call with a strike price of $125. Unfortunately, it is not available on the market, so you will have to create it synthetically. Design a portfolio to create a call with a strike price of $125 and demonstrate that it will give the same payoff as the desired call.

  • CreatedFebruary 25, 2015
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