The price of ULL stock is currently $110.  The stock will either increase by a factor of u=1.2 or decrease by a factor of d=0.6 in the following year.  The annual risk-free rate is 3% and the stock does not pay dividends.

 

Consider a European call option, C₁, written on ULL stock with a strike price of $66 that matures in one year.

 

A. Suppose that an investor wants to create a portfolio today that generates the same payoffs in both states of the world in 1 year, using ULL stocks and the call option C₁. Calculate the number of ULL stocks that an investor should purchase for each call option C₁ that he sells.

 

B. What is the price of the call option C₁ today?

Answer rating: 100% (QA)

A To create a portfolio that generates the same payoffs in both states of the world stock increase and stock decrease we need to determine the number ... View the full answer