ABC is trading currently at $100. Assume a one period Binomial Model, that the stock price...

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ABC is trading currently at $100. Assume a one period Binomial Model, that the stock price will either go up or down by 10% over the next period and the risk-free rate over the period is 5% (Take the period to be a year). a. Set up a synthetic riskless portfolio which consists of ABC stock and the call b. C. d. J option on ABC stock written today with a strike price of 100. What is the value hedge ratio A? From the results in a., how do you replicate a call option? Calculate the risk-neutral probabilities and value the call using the risk-neutral probabilities. (Check that you get the same answer as in a. above). Using the risk-neutral probabilities above also calculate the value of the find the value of a put option written today, lasting one period, and with an exercise price of 100. Verify that the same price for the put results from put-call parity. ABC is trading currently at $100. Assume a one period Binomial Model, that the stock price will either go up or down by 10% over the next period and the risk-free rate over the period is 5% (Take the period to be a year). a. Set up a synthetic riskless portfolio which consists of ABC stock and the call b. C. d. J option on ABC stock written today with a strike price of 100. What is the value hedge ratio A? From the results in a., how do you replicate a call option? Calculate the risk-neutral probabilities and value the call using the risk-neutral probabilities. (Check that you get the same answer as in a. above). Using the risk-neutral probabilities above also calculate the value of the find the value of a put option written today, lasting one period, and with an exercise price of 100. Verify that the same price for the put results from put-call parity.

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a To set up a synthetic riskless portfolio we need to determine the value hedge ratio A which represents the number of ABC stocks needed to replicate one call option Lets consider the two possible sce... View the full answer