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C & D only 4. You are attempting to value a call option...

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C & D only

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4. You are attempting to value a call option with an exercise price of $100 and 1 vear to expiration. The underlying stock pays no dividends, its current price is S100, and you believe it has a 50% chance of increasing to $120 and a 50% chance of decreasing to $80. The risk-free rate of interest is 10%. (a) What is the hedge ratio? (b) Calculate the call options value using the two-state stock price model (c) Your belief changes. Now you think the stock price will increase to $120 with probability 1/3 and decrease to $80 with probability 2/3. Nothing else changes. How does the price of the call option change? Now the stock becomes more volatile. The stock price then may increase to $130 with probability 1/3 or fall to S70 with probability 2/3. (d) How does the price of the call option change? Can you provide some intuition for this

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