Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent. The risk-free rate is 4 percent. Assume a one-period world. Answer questions 12 through 15 about a call with an exercise price of 80.
Question: What would be the call's price if the stock goes up?
a. 3.60b. 8.00
c. 5.71
d. 4.39
e. none of the above
Answer: B
Question: What would be the call's price if the stock goes down?
a. 8.00b. 3.60
c. 0.00
d. 9.00
e. none of the above
Answer: C
Question: What is the hedge ratio?
a. 0.429b. 0.714
c. 0.571
d. 0.823
e. none of the above
Answer: E
Question: What is the theoretical value of the call?
a. 8.00b. 4.39
c. 5.15
d. 5.36
e. none of the above
Answer: C
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