Question: Consider the below information: Two period, two state world. Let the current stock price be 90 The risk-free rate be 8%. Each period the stock

Consider the below information: Two period, two state world. Let the

Consider the below information: Two period, two state world. Let the current stock price be 90 The risk-free rate be 8%. Each period the stock price can go either up by 10% or down by 8%. A call option expiring at the end of the second period has an exercise price of 85. Requirements: 1. Find the stock price sequence (Su, Sa, su "?, Sud, Sdu , and 5.12) 2. Determine the possible prices of the call at the end of the second period (Cu, Ca, C. 2, Cud, Cdu , and Cd) 3. Determine the possible prices of the call at the end of the first period (Cu and Ca) 4. What is the current price of the call [C] 5. What is the initial hedge ratio [h] 6. Find the current value of the hedging portfolio (Vo), assuming you are hedging 1000 calls

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