Assume That the Current Stock Price Is $50 Per Share

question 103

Essay

Assume that the current stock price is $50 per share, that call options can be purchased with an exercise price of $60 per share, that bank loans can be obtained for a 10% nominal rate, and that at expiration of the option in three months, the stock will either be valued at $30 or $70.Show that it is possible to replicate the stock payoff by borrowing and buying a call option.

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Definitions:

Reasonable Time

An undefined period which is fair and appropriate under the circumstances for the performance of a certain action or fulfillment of a duty in a legal context.

Offer Expired

A situation where a proposal for a contract or agreement has reached its time limit without acceptance, rendering it void.

Communicating Acceptance

The process by which the party to whom an offer has been made notifies the offeror that they accept the terms of the offer.

Specified Means

A clearly defined method or procedure outlined for achieving a given end or goal.