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Corporate Finance · End Term · 21 Dec 2025 · September 2025 term

Question 28: A stock is trading at Rs 100 today. In 6 months, the sto…

Question 28

+4 marksOne or more correct options

A stock is trading at Rs 100 today. In 6 months, the stock price can either increase to Rs 120 or decrease to Rs 90. The six-month risk-free rate is 2%. A six-month call option has an exercise price of Rs 110. Select the correct statements based on the given information.

Select all that apply.

  1. A

    The risk-neutral probability that stock price increases is 40%.

  2. B

    The hedge ratio for the given call option is 2/3.

  3. C

    The purchase of one share can be hedged with 3 call options.

  4. D

    According to risk-neutral approach, the price of call option is Rs 3.92.

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Correct answers

  • A

    The risk-neutral probability that stock price increases is 40%.

  • C

    The purchase of one share can be hedged with 3 call options.

  • D

    According to risk-neutral approach, the price of call option is Rs 3.92.

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Question 28 of 30 in the IIT Madras BS Corporate Finance (Corporate Finance) End Term paper sat on 21 Dec 2025, in the September 2025 term (Corporate Finance 18 Dec 25). It carries 4 marks.

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