Lett Incorporated’s stock price is now $50, but it is expected eitherto rise by a factor of 1.5 or to fall by a factor of 0.7 by the end ofthe year. There is a call option on Lett’s stock with a strike price of$55 and an expiration date 1 year from now. What are the stock’spossible prices at the end of the year? ($75 or $35) What is thecall option’s payoff if the stock price goes up? ($20) If the stockprice goes down? ($0) If we sell 1 call option, how many sharesof Lett’s stock must we buy to create a riskless hedged portfolioconsisting of the option position and the stock? (0.5) What is thepayoff of this portfolio? ($17.50) If the annual risk-free rate is 6%,then how much is the riskless portfolio worth today (assumingdaily compounding)? ($16.48) What is the current value of the calloption? ($8.52)
Lett Incorporated’s stock price is now $50, but it is expected either
to rise by a factor of 1.5 or to fall by a factor of 0.7 by the end of
the year. There is a call option on Lett’s stock with a strike price of
$55 and an expiration date 1 year from now. What are the stock’s
possible prices at the end of the year? ($75 or $35) What is the
call option’s payoff if the stock price goes up? ($20) If the stock
price goes down? ($0) If we sell 1 call option, how many shares
of Lett’s stock must we buy to create a riskless hedged portfolio
consisting of the option position and the stock? (0.5) What is the
payoff of this portfolio? ($17.50) If the annual risk-free rate is 6%,
then how much is the riskless portfolio worth today (assuming
daily compounding)? ($16.48) What is the current value of the call
option? ($8.52)
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