Financial Risk Management
- Over the coming year, Ragworts stock price might drop from $100 to $50, or it might rise to $200. The one-year interest rate is 10%.
- What is the delta of a one-year call option on Ragwort stock with an exercise price of $100?
- Use the replicating-portfolio method to value this call.
- In a risk-neutral world, what is the probability that Ragwort stock will rise in price?
- Use the risk-neutral method to check your valuation of the Ragwort option.
- If someone told you that, in reality, there is a 60% chance that Ragworts stock price will rise to $200, would you change your view about the value of the option? Explain.
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