Upside Inc. currently trades for $50 per share. It is expected with equal probability to either rise in price to $55 per share in one year or $75 per share in one year. Assume the binomial model for option contracts.
a) Assume you will build a portfolio consisting of one share of Upside Inc. and call options onUpside Inc. with a strike price of $50 (for one share of stock). What is the hedge ratio for thisportfolio?
b) What is the price of a call option for this portfolio assuming a 10% risk-free rate?
c) Using put-call parity, what must the price of a put option with a strike price of $50 be today assuming a 10% risk-free rate?