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How do you use stock and bond to replicate its payoff

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A stock is trading at $50. It is known that at the end of two months it will be either $53 or $48. The risk-free interest rate is 10% per annum with continuous compounding.

a) A two-month European call option has a strike price of $49. How do you use stock and bond to replicate its payoff? What should be its price?

b) A two-month European put option has a strike price of $50. How do you use stock and bond to replicate its payoff? What should be its price?

Reference no: EM132403086

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