stock price, business and finance homework help

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mvzncvanon

Business Finance

Description

Consider a two-period, two-state world. Let the current stock price be $35 and the risk-free rate be 5%. In each period, the stock price can either go up by 10% or down by 10%. A call option expiring at the end of the second period has an exercise price of $30.

  1. What is the current price of the call?
  2. What is the initial hedge ratio

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Explanation & Answer

Attached.

(a) Here,
SU = 35.00*(1.10) = 38.50
SD = 35.00*(0.90) = 31.50
SUU = 38.50*(1.10) = 42.35
SUD = 38.50*(0.90) = 34.65
SDU = 31.50*(1.10) = 34.65
SDD = 31.50*(0...


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