# Question: Use the same data as in the previous problem only

Use the same data as in the previous problem, only suppose that the call price is $5 instead of $4.110.

a. At time 0, assume you write the option and form the replicating portfolio to offset the written option. What is the replicating portfolio and what are the net cash flows from selling the overpriced call and buying the synthetic equivalent?

b. What are the cash flows in the next binomial period (3 months later) if the call at that time is fairly priced and you liquidate the position? What would you do if the option continues to be overpriced the next period?

c. What would you do if the option is underpriced the next period?

a. At time 0, assume you write the option and form the replicating portfolio to offset the written option. What is the replicating portfolio and what are the net cash flows from selling the overpriced call and buying the synthetic equivalent?

b. What are the cash flows in the next binomial period (3 months later) if the call at that time is fairly priced and you liquidate the position? What would you do if the option continues to be overpriced the next period?

c. What would you do if the option is underpriced the next period?

## Answer to relevant Questions

Suppose that the exchange rate is $0.92/=C. Let r$ = 4%, and r=C = 3%, u = 1.2, d = 0.9, T = 0.75, n = 3, and K = $0.85. a. What is the price of a 9-month European call? b. What is the price of a 9-month American call? Suppose the S&P 500 futures price is 1000, σ = 30%, r = 5%, δ = 5%, T = 1, and n = 3. a. What are the prices of European calls and puts for K = $1000? Why do you find the prices to be equal? b. What are the prices of ...Let S = $100, K = $95, σ = 30%, r = 8%, T = 1, and δ = 0. Let u = 1.3, d = 0.8, and n = 2. Construct the binomial tree for a call option. At each node provide the premium, ∆ and B. Repeat the previous problem for n = 50. What is the risk-neutral probability that S1< $80? S1> $120? We sawin Section 10.1 that the undiscounted risk-neutral expected stock price equals the forward price. We will verify this ...Repeat Problem 11.4, only set δ = 0.08. What is the lowest strike price at which early exercise will occur? What condition related to put-call parity is satisfied at this strike price?Post your question