Consider a 6-month european call option on a stock now, Ask an Expert

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Consider a 6-month European call option on a stock now selling for 100, with a strike price of 97. You are given that σ = 0.25 and the force of interest for a 1-year period is 0.10. You would like to replicate this option by a trading strategy involving holdings in the stock and risk-free zero-coupon bonds of face amount 97, maturing in 6 months. You plan to use the Black-Scholes-Merton formula.

(a) What is the initial portfolio at time 0?

(b) At the end of 2 months, the stock price has risen to 105. What is your portfolio now?

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Statistics and Probability, Statistics

Category:- Statistics and Probability
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