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A stock currently trades at $100, and its price can increase or decrease by 10% over the following year. The risk-free rate is 3% per year. (a) We have call and put options written on this stock with strike prices of $105. What are the prices of these options? (b) How many shares would you need to buy to replicate the call option; that is, what is ? of the call option? (c) Suppose now that the stock price today is $101 instead of $100. What is the new price of the call option? (d) Suppose now that the stock price is again $100, but that instead of increasing or decreasing by 10% over the following year, the stock price will increase or decrease by 30%. What are the new prices of the call and put options?

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Financial Management, Finance

Category:- Financial Management
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