Madeline Manufacturing Inc.’s current stock price is $45 per share. Call options

Question

Madeline Manufacturing Inc.’s current stock price is $45 per share. Call options for this stock exist that permit the holder to purchase one share at an exercise price of $35. These options will expire at the end of 1 year, at which time Madeline’s stock will be selling at one of two prices $25 or $55. The risk-free rate is 3.5%. Using the binomial option pricing model, create a riskless hedged investment and answer the following questions:

After the payoffs have been equalized and the riskless hedged investment is created, what is the value of the portfolio in one year? Round your answer to two decimals if needed.

$

Explanation / Answer

First We can Calculate range of Stock and Option

AS just shown range of Payoff for the stock and option are $ 30 & $ 20 respectively to construct

risk free portfolio .667 or 1 share and 1 or 1.5 option we have selected 1 and 1.5 for easy calculation

Riskless Hedge Investment

we can buy one share and sell 1.5 option

First We can Calculate range of Stock and Option

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