Consider a stock currently trading at 25 that can go up or down by 15%...
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Accounting
Consider a stock currently trading at 25 that can go up or down by 15% per period. The risk-free rate is 10%. Use one-period binomial model.
A. Find the value of the option today.
B. Construct a hedge by combining a position in stock with a position in the call. Calculate the hedge ratio and show that return on the hedge portfolio is the real risk free regardless of the outcome, assuming that the call trading at the price obtained in part c.
C. Determine the rate of return from a risk free hedge if the call is trading at 3.50 when the hedge is initiated.
Please show all work. Thank you.
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