Financial Options: Madeline Manufacturing Quantitative Problem: Madeline Manufacturing Inc's current stock price is $45 per share. Call options for this stock exist that permit the holder to purchase one share at an exercise price of $35. These options will expire at the end of 1 year, at which time Madeline's stock will be selling at one of two prices $25 or $55. The risk-free rate is 5%. Using the binomial option pricing model, create a riskless hedged investment and answer the following question: After the payoffs have been equalized and the riskless hedged investment is created, what is the value of the portfollo in one year? Round your answer to the nearest cent.

Financial Options: Madeline Manufacturing Quantitative Problem: Madeline Manufacturing Inc's current stock price is $45 per share. Call options for this stock exist that permit the holder to purchase one share at an exercise price of $35. These options will expire at the end of 1 year, at which time Madeline's stock will be selling at one of two prices $25 or $55. The risk-free rate is 5%. Using the binomial option pricing model, create a riskless hedged investment and answer the following question: After the payoffs have been equalized and the riskless hedged investment is created, what is the value of the portfollo in one year? Round your answer to the nearest cent.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section20.A: The Black-scholes Option Pricing Model

Problem 1P

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Question

Financial Options: Madeline Manufacturing
Quantitative Problem:
Madeline Manufacturing Inc's current stock price is $45 per share. Call options for this stock exist that permit the holder to
purchase one share at an exercise price of $35. These options will expire at the end of 1 year, at which time Madeline's stock will
be selling at one of two prices $25 or $55. The risk-free rate is 5%. Using the binomial option pricing model, create a riskless
hedged investment and answer the following question:
After the payoffs have been equalized and the riskless hedged investment is created, what is the value of the portfolo in one year?
Round your answer to the nearest cent.
24

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