Problem 16-9 (Algo) We will derive a two-state call option value in this problem. Data: S = $210; X = $220; 1+r=1.10. The two possibilities for ST are $250 and $130. The portfolio consists of 1 share of stock and 4 calls short. Required: a. The range of S is $120 while that of C is $30 across the two states. What is the hedge ratio of the call? (Round your answer to 2 decimal places.) Hedge ratio Answer is complete and correct. 0.25 b. Calculate the value of a call option on the stock with an exercise price of $220. (Do not use continuous compounding to calculate the present value of X in this example, because the interest rate is quoted as an effective per-period rate.) (Do not round intermediate calculations. Round your answer to 2 decimal places.) Answer is complete but not entirely correct. Call value $ 27.27

Problem 16-9 (Algo) We will derive a two-state call option value in this problem. Data: S = $210; X = $220; 1+r=1.10. The two possibilities for ST are $250 and $130. The portfolio consists of 1 share of stock and 4 calls short. Required: a. The range of S is $120 while that of C is $30 across the two states. What is the hedge ratio of the call? (Round your answer to 2 decimal places.) Hedge ratio Answer is complete and correct. 0.25 b. Calculate the value of a call option on the stock with an exercise price of $220. (Do not use continuous compounding to calculate the present value of X in this example, because the interest rate is quoted as an effective per-period rate.) (Do not round intermediate calculations. Round your answer to 2 decimal places.) Answer is complete but not entirely correct. Call value $ 27.27