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You want to buy a stock that is currently selling for $60. You forecast that in one year, the stock's price will be either $98 or $20, with equal probabilities.

There is a one-year call option on the stock available with an exercise price of $80. You are able to borrow at a rate of 6.50%. You would like to hedge your stock position using the call option

a. What will be the call's value if the stock price is $98 in one year? What will be the call's value if the stock price is $20 in one year?

b. What is the hedge ratio you should use?

c. Assume that you can purchase fractional shares of stock How many shares of stock would you buy?

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M93039948

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