Question: Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent. The

Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent. The risk-free rate is 4 percent. Assume a one-period world. Answer the following:

  1. What would be the call's price if the stock goes up?
  2. What would be the call's price if the stock goes down?
  3. What is the hedge ratio?
  4. What is the theoretical value of the call?

Now extend the one-period binomial model to a two-period world. Answer the following:

  1. What is the value of the call if the stock goes up, then down?
  2. What is the hedge ratio if the stock goes down one period?
  3. What is the current value of the call?

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