Consider the following binomial option model. Stock price is 10 dollars now. In 1 year it can go to 12 dollars or 8 dollars. Interest rate with annual compounding is 10 percent. What ish the price of a 1 year call with strike 11.

Consider the following binomial option model. Stock price is 10 dollars now. In 1 year it can go to 12 dollars or 8 dollars. Interest rate with annual compounding is 10 percent. What ish the price of a 1 year call with strike 11.

A First Course in Probability (10th Edition)

10th Edition

ISBN:9780134753119

Author:Sheldon Ross

Publisher:Sheldon Ross

Chapter1: Combinatorial Analysis

Section: Chapter Questions

Problem 1.1P: a. How many different 7-place license plates are possible if the first 2 places are for letters and...

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Consider the following binomial option model. Stock price is 10 dollars now. In 1 year it can

go to 12 dollars or 8 dollars. Interest rate with annual compounding is 10 percent. What ish

the price of a 1 year call with strike 11.

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Step 1: Explaining about given information in question:

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Step 2: Calculating the Risk-Neutral Probabilities (p):

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Step 3: Determining the Option Payoff at Expiry:

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Step 4: Calculating discount the Expected Payoff to Present Value:

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