12. The stock of VS is currently selling at $10 per share. If the next year, the company’s stock is expected to be either $15 or $8 per share depending on the economic and company performance. The risk-free rate 18 percent. You are going to buy a one year call option on one share of VS with an exercise price of $12 (Show as detail of your calculation as possible)
Call Option’s Payoff Assignment
a. What is the call option’s payoff if the stock price rises to $15 at expiration (5 pts)? ANS:
b. What is the call option’s payoff if stock price falls to $8 at expiration? (5 pts)? ANS: Apply Binomial Option Pricing Model to answer the questions below for the option value of today.
c. How many shares of the VS stock needed to construct the replicating portfolio?