Question: Look again at the Alphabet call option that we valued in Section 23.2. Suppose that by the end of June 2016, the price of Alphabet

Look again at the Alphabet call option that we valued in Section 23.2. Suppose that by the end of June 2016, the price of Alphabet stock could double to $1,500 or halve to $375. Everything else is unchanged from our example.

a. What would be the value of the Alphabet call in June 2016 if the stock price is $1,500?

b. What would be the value of the call if the stock price in June is $375?

c. A strategy of buying three calls provides exactly the same payoffs as borrowing the present value of $X from the bank and buying two shares. What is X in this example?

d. What is the net cash flow in December 2015 from the policy of borrowing PV ($X) and buying two shares?

e. What is the value of the call option?

f. We have now assumed greater stock volatility than in our example in Section 23.2. Has this increased or decreased the value of the option?

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