Suppose that a stock is currently selling for $20, but could go up in price to $22 or fall to $18. Assume that the strike price is $21 and the option expires in 3 months. The interest rate is 12% a year.
A. Discuss your strategy of shares to be bought for each share of a call sold short, and explain why your portfolio would then be riskless.
B. Compute the value of the derivative.