per share. Over the investment period you think that the stock price might go down 10% or go up 15%. There is a call option available on the stock with an exercise price of $45. Answer the following questions about hedging your position in the stock. Assume that you will hold one share, and the risk-free rate is 5%. A) What is the hedge ratio? B) How much would you borrow to purchase the stock? What is the amount of your net investment in the stock?C) Complete the table below to show the value of your stock portfolio at the end of the holding period.ScenarioLow Stock Price High Stock PriceValue of Stock at Year EndRepayment of LoanTotalD) How many call options will you combine with the stock to construct the perfect hedge? Will you buy the calls or sell the calls?E) Show the option values in the table below. ScenarioLow Stock PriceHigh Stock PriceValue of Call PositionF) Show the net payoff to your portfolio in the table below.ScenarioLow Stock PriceHigh Stock PriceValue of Stock at Year EndValue of Call PositionTotalG) What must the price of one call option be?
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