Question

The current price of a non-dividend-paying stock is $291.72 and you expect the stock price to be either $320.89 or $265.2 after 0.5 years. A European call option on the stock has a strike price of $300 and expires in 0.5 years. The risk-free rate is 4% (EAR).

What is the hedge ratio, usually denoted delta, and defined as the number of shares of stock that we need to buy for each call written so that the portfolio is risk-free (perfectly hedged)?

How much money do you need to invest in riskless bonds to create a portfolio that replicates the payoff from one call option? Enter any amount borrowed as a negative number.

In an efficient capital market, what should be the price of the call option?

Answer 1

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