Demonstrate that return is the same as the risk-free rate

Reference no: EM131291118

Consider a European call with an exercise price of 50 on a stock priced at 60. The stock can go up by 15 percent or down by 20 percent each of two binomial periods. The risk-free rate is 10 percent. Determine the price today of the option. Then construct a riskfree hedge of long stock and short option. At each point in the binomial tree, show the composition and value of the hedge portfolio and demonstrate that the return is the same as the risk-free rate. On any revisions to the hedge portfolio, make the transactions (buying or selling) in stock and not options. You can borrow any additional funds required at the risk-free rate, and any excess funds should be invested at the risk-free rate.

Reference no: EM131291118

Questions Cloud

Construct a table containing the up and down factors : Construct a table containing the up and down factors for a one-year option with a stock volatility of 55 percent and a risk-free rate

Identify four problems a researcher might find : Identify four problems a researcher might find while screening questionnaires and preparing data for analysis.- How can data tabulation help researchers better understand and report findings?

Critical of all the phases of systems development : The Systems Analysis phase is the most critical of all the phases of systems development. Discuss and give reasons to support your position. The essay must not exceed 700 words of an appropriate response to the question. Please indicate your sourc..

Prepare a report using the numerical methods of statistics : Prepare a report (see below) using the numerical methods of descriptive statistics presented in this module to learn how each of the variables contributes to the success of a motion picture.

Demonstrate that return is the same as the risk-free rate : On any revisions to the hedge portfolio, make the transactions (buying or selling) in stock and not options. You can borrow any additional funds required at the risk-free rate, and any excess funds should be invested at the risk-free rate.

Perceive service and expected service : What support service do buyers of your product/service want and need? How can Sonic manage gaps between perceive service and expected service to satisfy customers?

How you use chi square and t tests in hypothesis testing : Explain the difference between the mean, the median, and the mode.- Why and how would you use Chi-square and t -tests in hypothesis testing?

Preparing a bankruptcy plan for the company : Be sure to address issues such as whether it would be better for Revco to file for formal bankruptcy instead of private restructuring, what the costs of the Revco bankruptcy will be, and how long you expect before Revco will emerge from bankruptcy..

Transforming vodafone global supply chain function : Propose an appropriate leadership style that Schultz would have needed to adopt when transforming Vodafone's global supply chain function. Outline an appropriate range of leadership skills that would have been required by Schultz to make the supply..

User Account

All Pages