1. Consider a portfolio of a stock and a short call option with the following properties. A....

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1. Consider a portfolio of a stock and a short call option with the following properties.

A. Stock price is currently $30.

B. In 3 months, it will be either $32 or $28.

C. Call option expiration is 3 months. The strike price is $31.

• Draw the binomial tree of payoffs.

• What is the number of shares which makes the portfolio risk-free? (Answer can be less than one share)

• What is the value of the option today?

• What is the risk-neutral probability value?

• Find the value of the option using this risk-neutral probability. (Show the equation, too)

Related Book For answer-question

Fundamentals of Futures and Options Markets

ISBN: 978-0132993340

8th edition

Authors: John C. Hull

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Posted Date: Jan 29, 2024 06:18 AM

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1. Consider a portfolio of a stock and a short call option with the following properties. A....

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Expert Answer:

To analyze the portfolio of a stock and a short call option we can use a binomial tree approach Lets go through each question step by step 1 Draw the binomial tree of payoffs We start by drawing a tre... View the full answer

Fundamentals of Futures and Options Markets

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