Chat with us, powered by LiveChat Financial Risk Management 3A - STUDENT SOLUTION USA
  1. Over the coming year, Ragworts stock price might drop from $100 to $50, or it might rise to $200. The one-year interest rate is 10%. 
  2. What is the delta of a one-year call option on Ragwort stock with an exercise price of $100?
  3. Use the replicating-portfolio method to value this call. 
  4. In a risk-neutral world, what is the probability that Ragwort stock will rise in price? 
  5. Use the risk-neutral method to check your valuation of the Ragwort option. 
  6. If someone told you that, in reality, there is a 60% chance that Ragworts stock price will rise to $200, would you change your view about the value of the option? Explain.
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