QBV, a non-dividend-paying stock, is currently trading for $100 a share. There is a 25-percent chance that

Question:

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 of $125. Unfortunately, it is not available on the market, so you will have to create it synthetically. Design a to create a call with a of $125 and demonstrate that it will give the same payoff as the desired call.

Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity. 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...