Amazonia provides a range of online shopping and web services and is listed on the stock exchange. It is currently the subject of a takeover offer that is expected to take 9 months to be resolved. The current stock price is 55 dollars. If the takeover offer is successful, shareholders will receive 70 dollars per share in 9 months from now. If the takeover offer is unsuccessful, the stock price is expected to fall to 35 dollars in 9 months from now. A call option written on this stock has an exercise price of 50 dollars and will mature in 9 months. The risk-free interest rate is 3.0 percent per annum. 1. What will be the value of the call option in 9 months if the takeover is successful? 2. Calculate the Delta of the call option? 3. There is a combination of a stock and a bond that replicates the payoffs of the call option under the two possible future outcomes. Calculate the cost of buying the correct number of shares in the replicating portfolio today? 4. Calculate the benefit of selling the correct number of risk-free bonds in the replicating portfolio today? 5. Calculate the current price of the call option using the replicating portfolio technique?
Added by Karen N.
Step 1
If the takeover is successful, the stock price will be 70 dollars. Since the exercise price of the call option is 50 dollars, the value of the call option will be the difference between the stock price and the exercise price, which is 70 - 50 = 20 dollars. Show more…
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