One-period binomial option pricing model: S = $100, q = 0.75 (the probability to go up), SU
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Question:
One-period binomial option pricing model: S = $100, q = 0.75 (the probability to go up), SU = $130, SD = $85, n = 1, X = 120, and risk-free rate = 2% per period.
(a) What is the risk-neutral probability for a call option with one period to maturity?
(b) What is the price of the call?
(c) What is the hedge rate of the call?
(d) How do you replicate the payoffs of a long call?
(e) How do you form a riskless hedge portfolio using the stock and the call?
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