CONSIDER A TWO-PERIOD, TWO-STATE WORLD. LET THE CURRENT STOCK PRICE BE $35 AND THE RISK-FREE RATE BE 5%. IN EACH PERIOD, THE STOCK PRICE CAN EITHER GO UP BY 10% OR DOWN BY 10%. A CALL OPTION EXPIRING AT THE END OF THE SECOND PERIOD HAS AN EXERCISE PRICE O

Consider a two-period, two-state world. Let the current stock price be $35 and the risk-free rate be 5%. In each period, the stock price can either go up by 10% or down by 10%. A call option expiring at the end of the second period has an exercise price of $30.

  1. What is the current price of the call?
  2. What is the initial hedge ratio

 

 
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