You have written a call option on 1 share of Z stock that is currently worth $15.You expect the price of the stock to either move to $20 or $10 over the next year.If the one-year risk-free interest rate is 10% and the strike price on the option is $15,what should have been the proceeds of the option?

Question

Quizplus · Accepted Answer

Number of shares to hedge: 20s - 5 = 10s-0 ====> s=.5
Payoff in either case: 20(.5)- 5 = 5; 10(.5)- 0 = 5 ====> 5/1.1 = 4.55
.5(15)- c = 4.55 ====> c = 2.95

You Have Written a Call Option on 1 Share of Z