Question: a. Given the preceding data, set up a perfect hedge and compute the call option's value.
b. What is the hedge ratio? What does it signify?
Based on the following data for a single-period binomial model:
Note: In this problem:
The up factor U is US/S = 120.773898/100 = 1.2077.
The down factor D is DS/S = 89.471504/100 = 0.8947
Dollar return 1 R = 1.0513.
We report numbers to four places and the final answer to two places after the decimal point although calculations consider ten places after the decimal point.