Question

YBM’s stock price S is $102 today. — After six months, the stock price can either go up to $115.63212672, or go down to $93.52995844. — Options mature after T = 6 months and have an exercise price of K = $105. — The continuously compounded risk-free interest rate r is 5 percent per year. Given the above data, the hedge ratio and the call option’s value are given by:

Group of answer choices

0.5810 for the hedge ratio and $6.2543 for the call option’s value

0.3810 for the hedge ratio and $5.5557 for the call option’s value

0.4810 for the hedge ratio and $5.1853 for the call option’s value

0.2523 for the hedge ratio and $4.1853 for the call option’s value

please provide explanation

Answer 1

Option (C) is correct

Hedge ratio = 0.4810

Call option value = $5.1853

For K = $105 and T = 6 months with rate of interest 5% per year this values can be calculated.

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