The Current Value of an Underlying Asset Is $80

question 28

Essay

The current value of an underlying asset is $80.The strike price of a call option with one month to expiration is $85.There is a 20% chance that in one month the value of the underlying asset will be $75 and an 80% chance that it will be $90.
a)What is the expected value of the underlying asset and the corresponding rate of return?
b)What is the hedge ratio and the corresponding value of the call given r = 0.02%?

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Definitions:

Alcohol

A chemical substance, commonly found in beverages such as beer, wine, and spirits, that can alter consciousness and is known for its potential for abuse and dependency.

Water

A transparent, tasteless, odorless, and nearly colorless chemical substance that is the main constituent of Earth's streams, lakes, and oceans, and the fluids of most living organisms.

Powders

Fine, dry particles produced by the grinding, crushing, or disintegration of a solid substance.

Fine Particles

Very small solid or liquid particles found in the air or emissions that can pose health risks when inhaled.