Question #2: Option Valuation (Binomial Option Pricing) [20 Points] Suppose you have just purchased one...
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Question #2: Option Valuation (Binomial Option Pricing) [20 Points] Suppose you have just purchased one share of Proctor & Gamble stock (PG) for $126. You have forecasted that in one year the stock price will either rise to $140 or fall to $110 Suppose further that you can either buy or sell a call option on PG stock with a strike price of $122. Assume that this is a European style contract that expires exactly in one year and that the risk-free interest rate is 2.2% (a) Calculate the hedge ratio (H). (5 Points] (b) Based on your answer from Part (a), fill in the following table showing that you have created a riskless portfolio. [8 Points] Stock Price = $110 Stock Price = $140 Value of Shares Value of Written Call Options Total Payoff (c) Calculate the price of the call option [7 Points]
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