Consider a stock worth $25 that can go up or down by 15 percent per period. The risk-free rate is 10 percent. Use one binomial period
a) Determine the two possible stock prices for the next period.
b) Determine the intrinsic values at expiration of a European call option with an exercise prices of $25
c) Find the value of the option today.
d) Construct a hedge position in the call. Show that the return on the hedge is the risk-free rate regardless of the outcome, assuming that the call sells for the value you obtained in part c.
e) Determine the rate of return from a riskless hedge if the call is elling for $3.50 when the hedge is initiated.