The stock price of Heavy Metal (HM) changes only once a month: either it goes up by

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The stock price of Heavy Metal (HM) changes only once a month: either it goes up by 20% or it falls by 16.7%. Its price now is $40. The interest rate is 12.7% per year, or about 1% per month.

a. What is the value of a one-month call option with an exercise price of $40?

b. What is the option delta?

c. Show how the payoffs of this call option can be replicated by buying HM’s stock and borrowing.

d. What is the value of a two-month call option with an exercise price of $40?

e. What is the option delta of the two-month call over the first one-month period?

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Principles of Corporate Finance

ISBN: 978-0077404895

10th Edition

Authors: Richard A. Brealey, Stewart C. Myers, Franklin Allen

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Question Posted: Dec 31, 2012 10:18 AM

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The stock price of Heavy Metal (HM) changes only once a month: either it goes up by

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a Using riskneutral method p X 20 1 p167 1 p 4...View the full answer

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