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A firm’s stock sells at $50. The stock price will be either $65 or $45 three months from now. Assume the 3-month risk-free rate is 1%.

a. What is the price of a European call with a strike price of $50 and a maturity of three months?

b. What is the price of a European call with a strike price of $55 and a maturity of three months?

c. What is the price of a European put with a strike price of $50 and a maturity of three months?

d. Find a portfolio of the stock and bond (a position in risk-free borrowing) such that buying the European call with a strike $50 is equivalent to holding this portfolio. Compare the cost of this portfolio with the call price.

Financial Management, Finance

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