A share of stock is currently priced at $20 and will change with equal likelihood to either $40 or $10.A call option with a $20 exercise price is available on the stock.The interest rate is zero.Which of the following positions will provide (approximately)the same payoffs as the option?
A) Buy 0.667 shares and lend $6.67
B) Buy 0.667 shares and borrow $6.67
C) Buy 0.5 shares
D) Sell 0.667 shares and borrow $0.667

Question

Quizplus · Accepted Answer

If share price falls to $10, option is worth $0 and position in share is worth $6.67 − $6.67 = $0If share price rises to $40, option is worth $20 and position in share is worth 0.667 × $40 − $6.67 = $20

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