You are given the following information. The option matures in 0.5 years and is at the money.
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Question:
a) Use the stock price and strike price information from above. Assume that the stock price can either go up by 20% or go down by 10% per period. Set up a replicating portfolio using the stock and a risk free bond using a one-period binomial model,
b) Graphically (and clearly) show all relevant information for the Stock, Bond and the Call.
c) Calculate the relevant number of Stocks and Bonds required to replicate the call.
d) Using no Arbitrage, compute the price of the Call option using this replicating portfolio.
e) Find the probability that the option will be exercised.
Related Book For
An Introduction to the Mathematics of financial Derivatives
ISBN: 978-0123846822
2nd Edition
Authors: Salih N. Neftci
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