Question: Call Option 3. We will derive a two-state call option value in this problem in a slightly different manner! Data: So = 100; X =

Call Option 3. We will derive a two-state call option value in Call Option

3. We will derive a two-state call option value in this problem in a slightly different manner! Data: So = 100; X = 110; 1 +r = 1.10 (i.e. r=10%). T=1 year. The two possibilities for Sy are 130 and 80. a. Show that the range of S is 50 while that of call option is 20 across the two states. What is the hedge ratio of the call? b. Form a portfolio by buying two shares of stock and writing five calls. What is the pay-off to this portfolio in the up state and in the "down state? What is the present value of the portfolio's (riskless) payoff? C. Given that the stock currently is selling at 100, show that the value of the call must be 10.91

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