1. A stock is now at $110. In a year its price will either be ssuming that the interest rate is r = 0.04 find the price of a cal Ow much stock Ao do we need to buy to replicate the option. (c) in cash and Ao in stock replicates the option exactly.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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6.1. A stock is now at $110. In a year its price will either be $121 or $99. (a)
Assuming that the interest rate is r = 0.04 find the price of a call (S₁ - 113)+. (b)
How much stock Ao do we need to buy to replicate the option. (c) Verify that having
Vo in cash and Ao in stock replicates the option exactly.
Transcribed Image Text:6.1. A stock is now at $110. In a year its price will either be $121 or $99. (a) Assuming that the interest rate is r = 0.04 find the price of a call (S₁ - 113)+. (b) How much stock Ao do we need to buy to replicate the option. (c) Verify that having Vo in cash and Ao in stock replicates the option exactly.
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