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Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent. The risk-free rate is 4 percent. Assume a one-period world. Answer the following questions about a call with an exercise price of 80. Use the formulas for these. Briefly discuss.

a. What would be the call's price if the stock goes up?

b. What would be the call's price if the stock goes down?

c. what is the hedge ratio?

d. what is the theoretical value of the call?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92833974

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