Over the coming year, Ragwort's stock price will halve to $30 from its current level of $60 or it will rise to $120. The one-year interest rate is 11%. a. What is the delta of a one-year call option on Ragwort stock with an exercise price of $60? (Round your answer to 4 decimal places.) b. Given the delta computed in part (a), how much would be borrowed if the replicating-portfolio method was used to value the call option? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. In a risk-neutral world, what is the probability that Ragwort stock will rise in price? (Round your answer to 2 decimal places.) d. Using the risk-neutral method, what is the value of the call option? (Do not round intermediate calculations. Round your answer to 2 decimal places.) e. If someone told you that in reality there is a 60% chance that Ragwort's stock price will rise to $120, would you change your view about the value of the option?
Over the coming year, Ragwort's stock price will halve to $30 from its current level of $60 or it will rise to $120. The one-year interest rate is 11%. a. What is the delta of a one-year call option on Ragwort stock with an exercise price of $60? (Round your answer to 4 decimal places.) b. Given the delta computed in part (a), how much would be borrowed if the replicating-portfolio method was used to value the call option? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. In a risk-neutral world, what is the probability that Ragwort stock will rise in price? (Round your answer to 2 decimal places.) d. Using the risk-neutral method, what is the value of the call option? (Do not round intermediate calculations. Round your answer to 2 decimal places.) e. If someone told you that in reality there is a 60% chance that Ragwort's stock price will rise to $120, would you change your view about the value of the option?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
100%
Nn.198.
Subject :- Finance
Transcribed Image Text:Over the coming year, Ragwort's stock price will halve to $30 from its current level of $60 or it will rise to
$120. The one-year interest rate is 11%.
a. What is the delta of a one-year call option on Ragwort stock with an exercise price of $60? (Round
your answer to 4 decimal places.)
b. Given the delta computed in part (a), how much would be borrowed if the replicating-portfolio method
was used to value the call option? (Do not round intermediate calculations. Round your answer to 2
decimal places.)
c. In a risk-neutral world, what is the probability that Ragwort stock will rise in price? (Round your answer
to 2 decimal places.)
d. Using the risk-neutral method, what is the value of the call option? (Do not round intermediate
calculations. Round your answer to 2 decimal places.)
e. If someone told you that in reality there is a 60% chance that Ragwort's stock price will rise to $120,
would you change your view about the value of the option?
a.
b.
C.
d.
e.
Delta
Loan amount
X Answer is complete but not entirely correct.
Probability
Value of call
Will you change your view about the value of the option?
$
$
No
0.6667
35.59
0.41✓
22.23 X
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