Consider a stock that is currently selling for $50. In one year from now, the value of the stock is expected to be either $45 or $60 (with equal probability). Assume that the risk-free interest rate is 4% associated with a risk-free bond with face value =$100 that can be purchased or sold.

1. How many shares of the above stock and the risk-free bond would generate payoffs equivalent to a (European) call option on the stock that has an exercise price equal to $54.
2. What is the price of this call option?
3. What is the price of the (European) put option with exercise price equal to $54?

Answer rating: 100% (QA)

Step by step explained answer Stepi 1 between highe... View the full answer