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What is the hedge ratio of the call

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Question - We will derive a two-state call option value in this problem. Data: So = $240; X= $250; 1 + r=1.10. The two possibilities for ST are $270 and $170. The portfolio consists of 1 share of stock and 5 calls short.

Required -

a. The range of S is $100 while that of C is $20 across the two states. What is the hedge ratio of the call?

b. Calculate the value of a call option on the stock with an exercise price of $250. (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: EM133174620

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