a. Suppose the stock price today is $95, not $100 as shown in Figure 16.1. Nothing else changes in the detailed example that follows Figure 16.1. Does delta still equal .67? What is the call price?

b. You calculate a delta of .8. How many shares and calls are needed to form a risk-free portfolio? What positions (i.e., long or short) does the investor have in shares and calls?

Figure 16.1

Transcribed Image Text:

Stock Price Tree and Option Priced Tree S=100 U Today L Sx u = The stock price in one period if the stock price increases: 100 x 1.10 = 110 Sx d = The stock price in one period if the stock price decreases: 100 x.95 = 95 C₁ Value of the call in one period = if the stock price increases: - MAX[Sx u - K, 0] = MAX[110 - 100, 0] = 10 C= Value of the call in one period if the stock price decreases: = MAX[Sx d - K, 0] = MAX[95-100, 0] = 0 Option expiration