6. The current price of a share of NOP Companys stock is $55. A call option for this stock permits the holder to purchase one share at an exercise price of $60. These options will expire at the end of 1 year, at which time NOPs stock will be selling at one of two prices, $50 or $70. The risk-free rate is 6%. You have been asked to perform the following tasks to arrive at value of the firm’s call options.
a.Explain how you create a riskless hedged investment.
b.What will be the value of this portfolio in one year?
c.What is the cost of the stock in the riskless portfolio?
d.What is the present value in the riskless portfolio?
e.What is the value of the firm’s call option?
What assumptions in this analysis might not hold in the real world?