Question

Q.3 (a) The current market price of the equity shares of N Ltd. is Rs. 70 per share. It may be
either Rs. 90 or Rs. 50 after a year. A call option with strike price of Rs. 66 with one year
maturity is available. The rate of interest applicable to the investor is 10%. An investor
wants to create a replicating portfolio in order to maintain his pay-off the call option for
100 shares. Find out hedge ratio, amount of borrowing, fair value of the call and his cash
flow position after a year.

Answer 1

Answer:

In △ABC AB=AC

⇒∠B=∠C (Angles opposite to equal sides are equal)

Now using angle sum property

∠A+∠B+∠C=180

∘

⇒80

∘

+∠C+∠C=180

∘

⇒2∠C=180

∘

−80

∘

⇒∠C=

2

100

∘

​

=50

∘

now ∠C+∠x=180

∘

(Angles made on straight line (AC) are supplementary)

⇒50

∘

+∠x=180

∘

⇒∠x=180

∘

−50

∘

=130

∘

@ARSH

insta@_arsh_deep_29

Hdndndn

Step-by-step explanation: