Suppose Carol's stock price is currently $20. In the next six months it will either fall to $10 or rise to $40. What is the current value of a six-month call option with an exercise price of $15? The six-month risk-free interest rate is 5 percent per six-month period. (Use the replicating portfolio method.)
A)$8.73
B)$10.28
C)$16.88
D)$13.33

Question

Quizplus · Accepted Answer

To find the value of the call option using the replicating portfolio method, we first calculate the hedge ratio (delta) as (40-15)/(40-10) = 0.8333. Then, we calculate the present value of the replicating portfolio: 0.8333 * 20 - (0.8333 * 10)/(1+0.05) = $8.73.

Suppose Carol's Stock Price Is Currently $20