Roslin Robotics stock has a volatility of 27% and a current stock price of $49 per share. Roslin pays no dividends. The risk-free interest is 4%. Consider a one-year call option with a strike price of $49 and suppose the call option is not available for trade in the market. You would like to replicate a long position in 1,000 call options.

a. What portfolio should you hold today?

b. Suppose you purchase the portfolio in part (a). If Roslin stock goes up in value to $51 per share today, what is the value of this portfolio now? If the call option were available for trade, what would be the difference in value between the call option and the portfolio (expressed as a percentage of the value of the call)?

c. After the stock price change in part (b), how should you adjust your portfolio to continue to replicate the options?

(Note: Make sure to round all intermediate calculations to at least four decimal places.)

Answer rating: 100% (QA)

a Portfolio Since the desired call option is not available we can replicate its behavior using a por... View the full answer