Over the coming year Ragwort’s stock price will halve to $35 from its current level of $70 or it will rise to $140. The one-year interest rate is 10%.
a. What is the delta of a one-year call option on Ragwort stock with an exercise price of $70? (Round your answer to 4 decimal places.)
Delta
b. Given the delta computed in part (a), how much would be borrowed if the replicating-portfolio method was used to value the call option? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Loan amount $
c. In a risk-neutral world what is the probability that Ragwort stock will rise in price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Probability
d. Using the risk-neutral method, what is the value of the call option? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Value of call $
e. If someone told you that in reality there is a 60% chance that Ragwort's stock price will rise to $140, would you change your view about the value of the option?
Yes | |
No |
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