Following is the information available pertaining to shares of O Ltd.: Current Market Price (₹) ₹ 840.00 Maximum Expected Price (₹) in 6 Months,…

(A) Call Option value using Replicating Portfolio Approach₹1050 (150)₹840₹756 (0)Δ = (₹150 - ₹0) / (₹1050 - ₹756) = 0.51Initial Investment= 0.51 x 840 = ₹ 428.40Value of Portfolio if Price goes down to ₹ 756.Value of holding 0.51 x ₹ 756 = ₹ 385.56Accordingly Let ‘P' be the option price, then428.40 - P = ₹385.56/1.0356 = ₹372.31P = ₹ 56.09(B) Value of Call Option using Risk Neutral MethodLet 'P' be the probability of Price increase, thenp x 1050 + (1-p) x 756 = 840(1.0356)147p = 50.48p = 0.39Probability of Price increase = 0.39Probability of Price decrease= 0.61Accordingly, the price of the options shall be:(0.39 × 150 + 0.61×0) / 1.0356 = ₹ 56.49(ii) In Risk Neutral Model, valuation of options is based on arbitrage and is therefore independent of risk preferences; one should be able to value options assuming any set of risk preferences and get the same answer. Hence, the given probability cannot be used to value the option. Instead, the risk-neutral probability should be computed and used for valuing the option.