Suppose the stock price is $50, strike price is $50, risk-free rate of 5% (continuous compounding), and

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Suppose the stock price is $50, strike price is $50, risk-free rate of 5% (continuous compounding), and time to maturity of 1 year. Assume a one period binomial option valuation model assuming u = 1.35 and d = 0.47.

a. Calculate the equivalent martingale measure (EMM) probability of an up move.

b. Calculate the hedge ratio (h*) to replicate the payouts of a call option.

c. Calculate the dollar amount borrowed (B*) to replicate the payouts of a call option.

d. Calculate the call value.

Related Book For answer-question

Derivatives Markets

ISBN: 9789332536746

3rd edition

Authors: Robert McDonald

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Posted Date: Feb 17, 2020 04:28 AM

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Suppose the stock price is $50, strike price is $50, risk-free rate of 5% (continuous compounding), and

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Derivatives Markets

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