c.Consider a call option with an exercise price of $105 and one year to expiration. The underlying stock pays no dividends and its current price is $100. The (risk-neutral) probabilities are a 50% chance of the stock price increasing to $130 and a 50 % chance of the stock price falling to $80. The risk free rate of interest is 4.75 % (per period). Determine the value of the option using the one- period binomial option pricing model.
c.Consider a call option with an exercise price of $105 and one year to expiration. The underlying stock pays no dividends and its current price is $100. The (risk-neutral) probabilities are a 50% chance of the stock price increasing to $130 and a 50 % chance of the stock price falling to $80. The risk free rate of interest is 4.75 % (per period). Determine the value of the option using the one- period binomial option pricing model.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:c.Consider a call option with an exercise price of
$105 and one year to expiration. The underlying
stock pays no dividends and its current price is
$100. The (risk-neutral) probabilities are a 50%
chance of the stock price increasing to $130 and a
50 % chance of the stock price falling to $80. The
risk free rate of interest is 4.75 % (per period).
Determine the value of the option using the one-
period binomial option pricing model.
With reference to c, suppose the (risk-neutral)
probabilities are a 50% chance of the stock price
increasing to $150 and a 50 % chance of the stock
price falling to $50. Provide recommendation to
buy or sell the call option. Justify your answer.
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