The price of a stock is 50 USD at time t = 0. It is...
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Accounting
The price of a stock is 50 USD at time t = 0. It is estimated that the price will be either 25 USD or 100 USD at t = 1 with no dividends paid. A European call with an exercise price of 50 USD is worth C at time t = 0. This call will expire at time t = 1. The market interest rate is 25%.
(1) What return can the owner of the following hedge portfolio expect at t = 1 for the following actions: sell 3 calls for C each, buy 2 stocks for 50 USD each, and borrow 40 USD at the market interest rate.
(2) Calculate the price C of a call.
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