Pearson eText Macroeconomics -- Instant Access (Pearson+)
13th Edition
ISBN: 9780136879503
Author: Michael Parkin
Publisher: PEARSON+
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Chapter 14.1, Problem 2RQ
To determine
Determine whether the
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Consider a call option on a stock that does not pay dividends.
The stock price is $100 per share, and the risk-free interest rate is 10%.
The call strike is $100 (at the money).
The stock moves randomly with u=2 and d=0.5.
1. Write the system of equations to replicate the option using A shares and B bonds.
2. Solve the system of equations and determine the number of shares and the number of bonds
needed to replicate the option. Show your answer with 4 decimal places (x.xxxx); do not
round intermediate calculations. This is easy to do in Excel.
A =
B =
3. Use A shares and B bonds from the prior question to calculate the premium on the option.
Again, do not round intermediate calculations and show your answer with 4 decimal places.
Call premium =
Answer these questions using replication or the risk neutral probability. Both methods will
produce the same answer.
Show your work to receive credit.
6. What is the premium of a call with a higher strike.
Show your work to receive credit; do not round intermediate calculations.
S0 = $100, u=2, d=0.5, r=10%, strike=$150
Answer these questions using replication or the risk neutral probability. Both methods will produce the same answer.
Chapter 14 Solutions
Pearson eText Macroeconomics -- Instant Access (Pearson+)
Ch. 14.1 - Prob. 1RQCh. 14.1 - Prob. 2RQCh. 14.1 - Prob. 3RQCh. 14.1 - Prob. 4RQCh. 14.2 - Prob. 1RQCh. 14.2 - Prob. 2RQCh. 14.2 - Prob. 3RQCh. 14.3 - Prob. 1RQCh. 14.3 - Prob. 2RQCh. 14.3 - Prob. 3RQ
Ch. 14.3 - Prob. 4RQCh. 14.4 - Prob. 1RQCh. 14.4 - Prob. 2RQCh. 14.4 - Prob. 3RQCh. 14.4 - Prob. 4RQCh. 14.4 - Prob. 5RQCh. 14 - Prob. 1SPACh. 14 - Prob. 2SPACh. 14 - Prob. 3SPACh. 14 - Prob. 4SPACh. 14 - Prob. 5SPACh. 14 - Prob. 6SPACh. 14 - Prob. 7SPACh. 14 - Prob. 8SPACh. 14 - Prob. 9SPACh. 14 - Prob. 10SPACh. 14 - Prob. 11SPACh. 14 - Prob. 12SPACh. 14 - Prob. 13SPACh. 14 - Prob. 14SPACh. 14 - Prob. 15SPACh. 14 - Prob. 16APACh. 14 - Prob. 17APACh. 14 - Prob. 18APACh. 14 - Prob. 19APACh. 14 - Prob. 20APACh. 14 - Prob. 21APACh. 14 - Prob. 22APACh. 14 - Prob. 23APACh. 14 - Prob. 24APACh. 14 - Prob. 25APACh. 14 - Prob. 26APACh. 14 - Prob. 27APACh. 14 - Prob. 28APACh. 14 - Prob. 29APACh. 14 - Prob. 30APACh. 14 - Prob. 31APACh. 14 - Prob. 32APACh. 14 - Prob. 33APACh. 14 - Prob. 34APACh. 14 - Prob. 35APACh. 14 - Prob. 36APACh. 14 - Prob. 37APACh. 14 - Prob. 38APACh. 14 - Prob. 39APACh. 14 - Prob. 40APACh. 14 - Prob. 41APA
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