If the stock price is 35 att= 1, then the call is worth nothing.
Step2:Movebackwardstotheearliertimeperiodandcreate
a replicating portfoliothat willprovidethe cash flowsthe
option will provide.
Inotherwords,borrowing$22.50andbuying5/7ofashare
willprovidethesamecashflowsasacallwithastrikeprice
of50.Thevalueofthecallthereforehastobethesameasthe
cost of creating this position:
Determinants of Value