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Determine the composition of the riskless portfolio

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Reference no: EM133110029

A European call

i) Determine the composition of the riskless portfolio. Option with a strike price of $10.40 which expires in five months is written over a stock that is currently priced at $10.00. It is known that at the end of five months the stock will be either worth $8 or $12. The risk-free interest rate is 1% p.a. (continuously compounded).

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

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

Reference no: EM133110029

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