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Assignment on options trading

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Options trading

A stock price at time = 0 is 120. At time 1, the stock price will be either 144 or 100. The one-period risk-free effective annual rate of interest is 10%.

i) Describe how you will determine the number of units of risk- free bond in a replicating portfolio that involves a put option on the stock at = 0, and find the number of units of risk-free bond in the replicating portfolio.

ii) An investor currently willing to sell you a call option with strike price 120 maturing at time = 1. The price of this call is 15. Design a trading strategy at time = 0, that will result in a risk-free arbitrage gain at time = 1.

Please include any reference or diagrams

Reference no: EM133000551

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