Two-state put option value

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Reference no: EM131028140

We will derive a two-state put option value in this problem. Data S₀ = 110; X = 120; 1 + r = 1.1. The two possibilities for S_T are 140 and 100.

a. The range of S is 40 while that of P is 20 across the two states. What is the hedge ratio of the call?

b. Calculate the value of call option on the stock with an exercise price of 120. (Do not use continuous compounding to calculate the present value of X in this example, because the interest rate is quoted as an effective per-period rate.)

Reference no: EM131028140

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