Speculate on a possible rise in stock price

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Reference no: EM13943091

Alan would like to speculate on a possible rise in stock price of Garmin. The current stock price of Garmin is $42. Alan expects that in one year the stock price of Garmin will be either $48 (up move) or $36 (down move). The exercise price of one-year European call option of Garmin-$45 and risk-free rate =1% annum. Alan would like to construct a portfolio with the stock and cash from borrowing to replicate the payoff of 100 units of European call option of Garmin.

a) How many shares of Garmin does Alan need to buy now?

b) How much ($) does Alan need to borrow now?

c) Calculate the percentage margin

d) Calculate the current price of European call option of Garmin per unit in this setting

Reference no: EM13943091

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