6.1. A stock is now at $110. In a year its price will either be $121...

 

Transcribed Image Text:

6.1. A stock is now at $110. In a year its price will either be $121 or $99. (a) Assuming that the interest rate is r = 0.04 find the price of a call (S₁ - 113)+. (b) How much stock Ao do we need to buy to replicate the option. (c) Verify that having Vo in cash and Ao in stock replicates the option exactly. 6.1. A stock is now at $110. In a year its price will either be $121 or $99. (a) Assuming that the interest rate is r = 0.04 find the price of a call (S₁ - 113)+. (b) How much stock Ao do we need to buy to replicate the option. (c) Verify that having Vo in cash and Ao in stock replicates the option exactly.

Answer rating: 100% (QA)

SOLUTION aTo compute the expected value of this option under the riskneutral measure Assuming that the interest rate is r 004 the riskneutral probabil... View the full answer