Question: A stock S has value S = 2 today and in one year the value either doubles or halves. Assuming interest rates are zero: (a)

A stock S has value S = 2 today and in one year the value either doubles or halves. Assuming interest rates are zero: (a) Show how to replicate a call option with strike at 2.5 using the stock and the riskless asset and calculate the price of the option today (b) Similarly replicate the put option struck at 2.5 and calculate its value today.

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

A stock S has value S = 2 today and in one year the value either doubles or halves. Assuming interest rates are zero: (a) Show how to replicate a call option with strike at 2.5 using the stock and...

A stock S has value S = 2 today and in one year the value either doubles or halves. Assuming interest rates are zero, what is the strike of the one year forward on the stock assuming the stock pays...

3. A stock S has value S = 4 today and in one year the value either doubles to 8 or halves to 2. Assuming interest rates are zero: (a) Show how to replicate a call option with strike at 5 using the...

1.You believe that volatility in a particular stock will occur soon, but you dont know whether the stock price will rise or fall. Consider put and call options for the stock, each option having a...

PROBLEMS ? Show your work! For time value of money problems, show your inputs,and tell me what you use for the calculations! No work and its wrong = 0 points!1. (7 points) In the Wall Bricks, Inc.?s...

ACG32: FINANCE AND INVESTMENT - STUDY PERIOD 1, 2008 ACG 23 BUSINESS FINANCE OUA STUDENTS - STUDY PERIOD 3, 2016 ASSIGNMENT 2 INFORMATION General Assignment Details Completion - Individual Basis This...

Hi. Could anyone help me with this set of problems? My father recently passed away and i missed a lot of classes. The professor says I have to go see the Teaching Assistants but I am not in school...

Final_Exam_Macro Question 1 (2 points) Purchasing-power panty theory does not hold at all times because many goods are not easily transported and the same goods produced in different countries may be...

You have developed the following data on a 2-stock portfolio Which scenario seems to be out of place? Expected return 0.25 0.25 Scenario L. Correlation = 0.98 M. Correlation = 0.35 N. Correlation =...

Hi there I need help answering ASSIGNMENT 1 ONLY by Friday afternoon. I have attached the study pack to help answer the question. Thanks! FIN4802 ASSIGNMENTS ASSIGNMENT 01 Due date: 13 May 2016...

You work as the public relations manager on a fashion account at an agency. You are working on a large event for a new product launch, a glitzy event that will gain significant media attention. There...

1. The sum of the Fed's monetary liabilities and the U.S. Treasury's monetary liabilities is called A) the money supply. B) currency in circulation. C) the monetary base. D) bank reserves.

Costs that change as output changes are: None of the statements is correct. sunk costs. variable costs. fixed costs. 3 8 of 5 0 questions saved

T14:Please match each term with the most appropriate definition. You will be given one attempt. No time limit. Best motivation for starting BPM Essential element of all BPM projects Focuses on...