You are attempting to value a call option with an exercise price of $108 and 1 y

Question

You are attempting to value a call option with an exercise price of $108 and 1 year to expiration. The underlying stock pays no dividends, its current price is $108, and you believe it has a 50% chance of increasing to $130 and a 50% chance of decreasing to $86. The risk-free rate of interest is 10%. Calculate the call option’s value using the two-state stock price model. (Do not round intermediate calculations and round your final answer to 2 decimal places. Omit the "$" sign in your response.)

Call option’s value=

Explanation / Answer

Value of call when price is 130 = 130 - 108 = 22

value of call when price is 86 = 0 since it expires worthless

expected value in one year = 0.5*22 + 0.5*0 = 11

call option's value = 11/1.10 = 10.00

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.