Burgundy Corporations stock price is currently $100. At the end of 3 months it will be either $110 or $90.91. The risk-free interest rate is 2% per annum. What is the value of a 3-month European call option with a strike price of $100? Calculate your answer to this problem using
(b) the risk-neutral method.© BrainMass Inc. brainmass.com April 1, 2020, 11:27 pm ad1c9bdddf
First we need to calculate the option's hedge ratio:
∆ = (10-0) / (110-90.01) = 0.5238
In order to to replicate the call, we need to buy ∆ shares and finance this by borrowing at rf . Assuming the given rate is the APR, the amount ...
Using both replication and the risk-neutral method, the value of a 3 month call option is found for the Burgundy Corporations example.