Answer Happy

Almost all option pricing models are based on the concept of
a riskless hedge. Investors can create a riskless hedge by
purchasing shares of stock and simultaneously selling a call option
on the stock.
Suppose Randall and Arts Inc. stock is currently selling for
$70.00 per share. Options exist that permit the holder to buy one
share at an exercise price of $65.00. These options will expire at
the end of one year. When the options expire, Randall and Arts
Inc.’s stock will either be selling for $85.00 or $45.00. What is
the range of Randall and Arts Inc.’s ending stock prices?
$40.00
$35.00
$20.00
$50.00
What is the range of Randall and Arts Inc.’s ending option
values?
$20.00
$35.00
$40.00
$30.00
To construct a riskless portfolio, an investor will need to
equalize these ranges. If the investor is planning on selling one
option, how many shares of stock should he or she buy to equalize
these ranges? Assume that for this problem you can buy less than
one share of stock.
0.60
0.45
0.3
0.50
If the investor decides to go forward with creating this
riskless hedge, what will the ending total value of the portfolio
be?
$21.25
$22.50
$18.75
$25.00
What will the equilibrium price of the call option be if the
risk-free rate is 9%?
$12.92
$14.36
$10.77
$15.08