Financial Risk Management 3A

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