A share of stock is currently priced at $20 and will change with equal likelihood to either $55 or $15. A call option with a $25 exercise price is available on the stock. You want to borrow funds to purchase the stock in order to replicate the call option. How many shares of stock must be purchased to replicate one call option?
A) 1.33 shares
B) 0.75 share
C) 0.80 share
D)1.25 shares

Question

Quizplus · Accepted Answer

Shares needed = Max[($55 - 25), $0] - Max[($15 - 25), $0]/($55 - 15) = 0.75

A Share of Stock Is Currently Priced at $20 and Will