A stock is selling at $102 will either go up at the rate of 10% or...

 

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A stock is selling at $102 will either go up at the rate of 10% or go down at the rate of -10% next year. The constant risk-free rate is 5% per year continuously compounded. Consider the evaluation of the European call on the stock with strike K-$100 and maturing in one year. a. Hedging Portfolio i. Construct a hedging portfolio. ii. Use the hedging portfolio to price the call. b. Replicating Portfolio i. Construct a portfolio that replicates the option. ii. Use the replicating portfolio to price the call. c. Risk Neutral Valuation 111. Calculate the price of the option by using the risk neutral valuation. A stock is selling at $102 will either go up at the rate of 10% or go down at the rate of -10% next year. The constant risk-free rate is 5% per year continuously compounded. Consider the evaluation of the European call on the stock with strike K-$100 and maturing in one year. a. Hedging Portfolio i. Construct a hedging portfolio. ii. Use the hedging portfolio to price the call. b. Replicating Portfolio i. Construct a portfolio that replicates the option. ii. Use the replicating portfolio to price the call. c. Risk Neutral Valuation 111. Calculate the price of the option by using the risk neutral valuation.

Answer rating: 100% (QA)

To solve this problem well first construct a hedging portfolio and then use it to price the call option After that well construct a replicating portfolio and use it to price the call option Finally we... View the full answer