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Valuation of Call Options

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1) Conduct research on two different models used to price call options. Detail each model in a Word document and focus on comparing and contrasting the models.

2) Consider a two-period, two-state world. Let the current stock price be $60 and the risk-free rate be 10%. In each period, the stock price can either go up by 15% or down by 20%. A call option expiring at the end of the second period has an exercise price of $50.

Find the stock price sequence.
Determine the possible prices of the call at expiration.
Find the possible prices of the call at the end of the first period.
What is the current price of the call?
What is the initial hedge ratio?

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Solution Summary

Conducts research on two different models used to price call options and values a call option using Binomial tree.

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