Question: (16.7) We will derive a two-state call option value in this problem. Data: S 0 = $210; X = $220; 1 + r = 1.10.

(16.7) We will derive a two-state call option value in this problem. Data: S₀ = $210; X = $220; 1 + r = 1.10. The two possibilities for S_T are $250 and $130. The portfolio consists of 1 share of stock and 4 calls short.

a. The range of S is $120 while that of C is $30 across the two states. What is the hedge ratio of the call?

b. Calculate the value of a call option on the stock with an exercise price of $220. (Do not use continuous compounding to calculate the present value of X in this example, because the interest rate is quoted as an effective per-period rate.)

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