Consider a european call with an exercise price of 50 on a, Ask an Expert

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Consider a European call with an exercise price of $50 on a stock priced at $60. The stock can go up by 15% or down by 20% in each of two binomial periods. The risk free rate is 10%.

a) Determine the price of the option today.

b) Construct a risk-free hedge of long stock and short option at t=0 and at each node of the binomial tree.

c) Describe the arbitrage portfolio you would construct if the market price of the call at t=0 is $1.5 less than the theoretical price.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92835499

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