Question

Over the coming year Ragwort’s stock price will halve to $35 from its current level of $70 or it will rise to $140. The one-year interest rate is 10%.

a. What is the delta of a one-year call option on Ragwort stock with an exercise price of $70? (Round your answer to 4 decimal places.)

Delta            

b. Given the delta computed in part (a), how much would be borrowed if the replicating-portfolio method was used to value the call option? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Loan amount            $

c. In a risk-neutral world what is the probability that Ragwort stock will rise in price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Probability            

d. Using the risk-neutral method, what is the value of the call option? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Value of call            $

e. If someone told you that in reality there is a 60% chance that Ragwort's stock price will rise to $140, would you change your view about the value of the option?

	Yes
	No