Stock A is currently traded at $100. Each year, the stock price can either go...
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Finance
Stock A is currently traded at $100. Each year, the stock price can either go up by 10% or drop by 10%. Your manager asks you to price an European call option with a strike price of $85 and a maturity of two years from now. The YTM of a one-year zero Treasury bond is 4% and the forward rate from year one to year two is 6%.
Suppose the discount rate you use is 5% for the second period. To create the replicating portfolio for the second year, how many shares should you trade if the stock price goes up by 10% during the first year?
Group of answer choices
0
0.78
1.00
Cannot be determined because the probability for the stock price to move up/down is not given for the second year.
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