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Calculate the price of a call option expiring in two periods

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Reference no: EM13856411

Consider a two-period binomial model in which a stock currently trades at a price of $65. The stock price can go up 20 percent or down 17 percent each period. The risk free rate is 5 percent.

A. Calculate the price of a call option expiring in two periods with an exercise price of $60.

B. Based on your answer in Part A, calculate the number of units of the underlying stock that would be needed at each point in the binomial tree to construct a risk free hedge. Use 10,000 calls.

C. Calculate the price of a call option expiring in two periods with an exercise price of $70.

D. Based on your answer in Part C, calculate the number of units of the underlying stock that would be needed at each point in the binomial tree to construct a risk free hedge. Use 10,000 calls.

Reference no: EM13856411

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