You are attempting to value a call option with an exercise price of $50 and one

Question

You are attempting to value a call option with an exercise price of $50 and one year to expiration. The underlying stock pays no dividends, its current price is $50, and you believe it has a 50% chance of increasing to $60 and a 50% chance of decreasing to $40. The risk-free rate of interest is 5%. Based upon your assumptions, calculate your estimate of the the call option's value using the two-state stock price model. (Do not round intermediate calculations. Round your answer to 2 decimal places.)  

Value of the call            $   

Explanation / Answer

when price is 60, value of call = 60 - 50 = 10

when price is 40 , call expires worthless

expected value of call in one year = 0.50*10 + 0.5*0 = 5

value of the call option today = 5/1.05 = 4.76

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