Question: For Part 2, how to value put option using portfolio replication method? (a) (i) A call option on the stock of Bovisand has an exercise

For Part 2, how to value put option using portfolio replication

For Part 2, how to value put option using portfolio replication method?

(a) (i) A call option on the stock of Bovisand has an exercise price of $56 and time to maturity of one year. The current stock price is $59. In one year's time the price of the stock will rise to $65 or fall to $53. The annual risk- free interest rate is 5%. Using the replicating portfolio method calculate the call option price. (7 marks) (ii) Using the replicating portfolio method calculate the no-arbitrage price of a put option on this stock with the same exercise price and time to maturity as the call option. (7 marks) (a) (i) A call option on the stock of Bovisand has an exercise price of $56 and time to maturity of one year. The current stock price is $59. In one year's time the price of the stock will rise to $65 or fall to $53. The annual risk- free interest rate is 5%. Using the replicating portfolio method calculate the call option price. (7 marks) (ii) Using the replicating portfolio method calculate the no-arbitrage price of a put option on this stock with the same exercise price and time to maturity as the call option. (7 marks)

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