Question: Let us consider a stock (called stock A) whose price today is 12. Suppose that in six months' time the price can only go up

Let us consider a stock (called "stock A) whose price today

Let us consider a stock (called "stock A) whose price today is 12. Suppose that in six months' time the price can only go up to 16 or down to 10. Suppose the interest rate is 10% per annum continuously compounded. Let us consider a call option (called "call option B) written on this stock, with maturity date of 6 months and strike price 13. (a) Determine the fair price c for this call option (show all the steps of your work). Assume that the seller of call options B starts with zero capital, sells 100 call options (each at the fair price c obtained in the previous question), and borrows money to buy A shares of the stock A. (b) How many shares should he buy in order to run no risk at the end of the six months period? Let us consider a stock (called "stock A) whose price today is 12. Suppose that in six months' time the price can only go up to 16 or down to 10. Suppose the interest rate is 10% per annum continuously compounded. Let us consider a call option (called "call option B) written on this stock, with maturity date of 6 months and strike price 13. (a) Determine the fair price c for this call option (show all the steps of your work). Assume that the seller of call options B starts with zero capital, sells 100 call options (each at the fair price c obtained in the previous question), and borrows money to buy A shares of the stock A. (b) How many shares should he buy in order to run no risk at the end of the six months period

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