You want to buy a stock that is currently selling for $50. You forecast that in one year, the stock’s price will be either $106 or $12, with equal probabilities. There is a one-year call option on the stock available with an exercise price of $80. You are able to borrow at a rate of 6.50%. You would like to hedge your stock position using the call option.
a. What will be the call’s value if the stock price is $106 in one year? What will be the call’s value if the stock price is $12 in one year?
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