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A risky stock is currently trading at $100 and its market value a year later will...

A risky stock is currently trading at $100 and its market value a year later will be either $200 (if certain projects go well for the corporation) or $50 (if things turn out bad for those important projects). There is a one-year zero-coupon bond available with a par value $100 that currently trades for $90. Can you create a portfolio of the stock and the bond that will replicate the payoff of a call option on the stock with strike $100 and expiry in 1 year? Then, can you price the call? Explain carefully how will you do all this.

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Formula sheet

jeff jeffy answered 2 years ago
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