Question: We will derive a two-state call option value in this problem. Data: S0 = $130; X = $140; 1 + r = 1.10. The two

We will derive a two-state call option value in this problem. Data: S0 = $130; X = $140; 1 + r = 1.10. The two possibilities for ST are $170 and $95. The portfolio consists of 2 shares of stock and 5 calls short.

Required:

a. The range of S is $75 while that of C is $30 across the two states. What is the hedge ratio of the call? (Round your answer to 2 decimal places.)

Hedge Ratio:

b. Calculate the value of a call option on the stock with an exercise price of $140. (Do not use continuous compounding to calculate the present value of X in this example, because the interest rate is quoted as an effective per-period rate.) (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Call Value:

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