We will derive a two-state call option value in this problem. Data: Se = $160, X= $170, 1+/=110. The two possibilities for Sy are $190 and $110. The portfolio consists of 1 share of stock and 4 calls short.
Required:
a. The range of Sis $80 while that of C is $20 across the two states. What is the hedge ratio of the call? (Round your answer to 2 decimal places.)
Hedge ratio
b. Calculate the value of a call option on the stock with an exercise price of $170. (Do not use continuous compounding to calculate the present value of Xin 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.)
Call value