Find the range of values for the ending stock price

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Problem - BINOMIAL MODEL - The current price of a stock is $55. In 1 year, the price will be either $50 or $65. The annual risk-free rate is 5.5%. The stock has an exercise price of $60 and expires in 1 year.

a. Find the range of values for the ending stock price and the call option at the option's expiration in 1 year.

b. Equalize the range of payoffs for the stock and the option.

c. Create a riskless hedged investment. What is the value of the portfolio in 1 year?

d. What is the cost of the stock in the riskless portfolio?

e. What is the present value of the riskless portfolio?

f. From your answers in parts d and e, what is the value of the firm's call option?

Reference no: EM132803015

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