Assume that you can purchase fractional shares of stock

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Reference no: EM132040915

You want to buy a stock that is currently selling for $65. You forecast that in one year, the stock’s price will be either $100 or $24, 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 $100 in one year? What will be the call’s value if the stock price is $24 in one year?

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

Reference no: EM132040915

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