Ken is interested in buying a European call option written on Southeastern Airlines, Incorporated, a non-dividend-paying common stock, with a strike price of $90 and one year until expiration. Currently, the company’s stock sells for $90 per share. Ken knows that, in one year, the company’s stock will be trading at either $112 per share or $76 per share. Ken is able to borrow and lend at the risk-free EAR of 5 percent.
a. What should the call option sell for today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
b. What is the delta of the option? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., .16.)
c. How much would Ken have to borrow to create a synthetic call? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
d. How much does the synthetic call option cost? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
