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A stock price is currently $42. Its stock price will be either $45 or $38 one year from now. The risk-free rate is 5%. A one-year call on the stock has an exercise price of $40.

(a) What are its intrinsic values at stock prices of $45 and $38, respectively?

(b) What should be the hedge ratio?

(d) What is the value of the call today?

(e) Verify your answer using the risk-neutral approach-do not just say that you have the same answer; you will need to show the work that the two approaches give the same answer

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M9751527

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