Determine the composition of the riskless portfolio

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A European call option with a strike price of $20.40 which expires in five months is written over a stock that is currently priced at $20.00. It is known that at the end of five months the stock will be either worth $17 or $23. The risk-free interest rate is 1% p.a. (continuously compounded).

i) Determine the composition of the riskless portfolio.

ii) Use no-arbitrage arguments to determine the value of the call option.

iii) If instead, risk-neutrality was assumed, what is the probability of a share price increase?

Reference no: EM133060871

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