Calculate the risk-neutral probabilities

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Reference no: EM133275083

ABC is trading currently at $100. Assume a one period Binomial Model, that the stock price will either go up or down by 10% over the next period and the risk-free rate over the period is 5% [Take the period to be a year).

a. Set up a synthetic riskless portfolio which consists of ABC stock and the call option on ABC stock written today with a strike price of 100. 1What is the value hedge ratio .15?

b. From the results in a., how do you replicate a call option?

c. Calculate the risk-neutral probabilities and value the call using the risk-neutral probabilities. [Check that you get the same answer as in a. above).

d. Using the risk-neutral probabilities above also calculate the value of the ?nd the value of a put option written today, lasting one period, and with an exercise price of 100.

e. Verify that the same price for the put results from put-call parity.

Reference no: EM133275083

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