Suppose you have just purchased one share of Proctor & Gamble stock (PG) for $126. You...
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Suppose you have just purchased one share of Proctor & Gamble stock (PG) for $126. You have forecasted that in one year the stock price will either rise to $140 or fall to $110 Suppose further that you can either buy or sell a call option on PG stock with a strike price of $122. Assume that this is a European style contract that expires exactly in one year and that the risk-free interest rate is 2.2%. (a) Calculate the hedge ratio (H). [5 Points] (b) Based on your answer from Part (a), fill in the following table showing that you have created a riskless portfolio. [8 Points] Stock Price $110 Stock Price $140 Value of Shares Value of Written Call Options Total Payoff (c) Calculate the price of the call option [7 Points] Suppose you have just purchased one share of Proctor & Gamble stock (PG) for $126. You have forecasted that in one year the stock price will either rise to $140 or fall to $110 Suppose further that you can either buy or sell a call option on PG stock with a strike price of $122. Assume that this is a European style contract that expires exactly in one year and that the risk-free interest rate is 2.2%. (a) Calculate the hedge ratio (H). [5 Points] (b) Based on your answer from Part (a), fill in the following table showing that you have created a riskless portfolio. [8 Points] Stock Price $110 Stock Price $140 Value of Shares Value of Written Call Options Total Payoff (c) Calculate the price of the call option [7 Points]
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Answer rating: 100% (QA)
Current worth 126 It can go up U 140 It can go down D110 Probability ... View the full answer
Related Book For
Cost Accounting Foundations and Evolutions
ISBN: 978-1111626822
8th Edition
Authors: Michael R. Kinney, Cecily A. Raiborn
Posted Date:
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