Pearson eText Macroeconomics -- Access Card
7th Edition
ISBN: 9780136850014
Author: Hubbard, Glenn, O'Brien, Anthony
Publisher: PEARSON
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Chapter 4, Problem 4.3.16PA
To determine
The quantity demanded at
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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 4 Solutions
Pearson eText Macroeconomics -- Access Card
Ch. 4.A - Prob. 1RQCh. 4.A - Prob. 2RQCh. 4.A - Prob. 3RQCh. 4.A - Why would economists use the term deadweight loss...Ch. 4.A - Prob. 5PACh. 4.A - Prob. 6PACh. 4.A - Prob. 7PACh. 4.A - Prob. 8PACh. 4.A - Prob. 9PACh. 4 - Prob. 1TC
Ch. 4 - Prob. 2TCCh. 4 - Prob. 4.1.1RQCh. 4 - Prob. 4.1.2RQCh. 4 - Prob. 4.1.3RQCh. 4 - Prob. 4.1.4RQCh. 4 - Prob. 4.1.5PACh. 4 - Prob. 4.1.6PACh. 4 - Prob. 4.1.7PACh. 4 - Prob. 4.1.8PACh. 4 - Prob. 4.1.9PACh. 4 - Prob. 4.1.10PACh. 4 - Prob. 4.1.11PACh. 4 - Prob. 4.1.12PACh. 4 - Prob. 4.1.13PACh. 4 - Prob. 4.1.14PACh. 4 - Prob. 4.2.1RQCh. 4 - What is economic efficiency? Why do economists...Ch. 4 - Prob. 4.2.3PACh. 4 - Prob. 4.2.4PACh. 4 - Prob. 4.2.5PACh. 4 - Prob. 4.2.6PACh. 4 - Prob. 4.2.7PACh. 4 - Prob. 4.2.8PACh. 4 - Prob. 4.2.9PACh. 4 - Prob. 4.2.10PACh. 4 - Prob. 4.3.1RQCh. 4 - Prob. 4.3.2RQCh. 4 - Prob. 4.3.3RQCh. 4 - Prob. 4.3.4RQCh. 4 - Prob. 4.3.5PACh. 4 - Prob. 4.3.6PACh. 4 - Prob. 4.3.7PACh. 4 - Prob. 4.3.8PACh. 4 - Prob. 4.3.9PACh. 4 - Prob. 4.3.10PACh. 4 - Prob. 4.3.11PACh. 4 - Prob. 4.3.12PACh. 4 - Prob. 4.3.13PACh. 4 - Prob. 4.3.14PACh. 4 - Prob. 4.3.15PACh. 4 - Prob. 4.3.16PACh. 4 - Prob. 4.3.17PACh. 4 - Prob. 4.3.18PACh. 4 - Prob. 4.3.19PACh. 4 - Prob. 4.4.1RQCh. 4 - Prob. 4.4.2RQCh. 4 - Prob. 4.4.3RQCh. 4 - Prob. 4.4.4RQCh. 4 - Prob. 4.4.5PACh. 4 - Prob. 4.4.6PACh. 4 - Prob. 4.4.7PACh. 4 - Prob. 4.4.8PACh. 4 - Prob. 4.4.9PACh. 4 - Prob. 4.4.10PACh. 4 - Prob. 4.2CTE
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