A. If the risk-free interest rate is 10% per year, what must be the price of a 3-month call option on the stock at an exercise price of $50 if it is in the money?
B. Illustrate what would be a simple options strategy utilizing a put and a call to exploit your conviction about the stock price"s future movement? What is the most money you can make on this position? How far can the stock price move in either direction before you lose money?
C. How can you create a position involving a put, a call, and T-bills that would have the same payoff structure as the stock at expiration? Binomial option pricing: Consider a two-state model to value a call option: Assume that S0 = 100, X = 110, r = 5% (interest rate over the life of the option), stock price in the two states is S u = 130 and Sd = 80. Go through the 6 steps from class to price the option:
a. What is the payoff to the option in the up state and the down state?
B. What is the hedge ratio H?
c. What is the payoff to the risk-free p