You are given the following information. The option matures in 0.5 years and is at the...

You are given the following information. The option matures in 0.5 years and is at the money. The current stock price of the underlying stock is $90.00, and the annualized 365 day t-bill rate is 5.0%. Compute the following:

a) Use the stock price and strike price information from above. Assume that the stock price can either go up by 20% or go down by 10% per period. Set up a replicating portfolio using the stock and a risk free bond using a one-period binomial model,

b) Graphically (and clearly) show all relevant information for the Stock, Bond and the Call.

c) Calculate the relevant number of Stocks and Bonds required to replicate the call.

d) Using no Arbitrage, compute the price of the Call option using this replicating portfolio.

e) Assume that the annual sigma (or Standard Deviation) for the stock is 25%. Compute the BlackScholes-Merton value of the Call option for above.

Expert Solution

jeff jeffy answered 1 year ago

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