The spot price of a non-dividend paying stock is recorded as t70 at the close of the day. You estimate that this price is equally likely to go up or down by 30% over the next nine months and observe that the continuously compounded annual risk-free rate is 20% per year across all maturities. Use a single-step binomial tree together with the mimicking portfolio approach to compute the theoretical price of a European call option written on this stock with a strike price of t55 and exactly nine months until expiration.

The spot price of a non-dividend paying stock is recorded as t70 at the close of the day. You estimate that this price is equally likely to go up or down by 30% over the next nine months and observe that the continuously compounded annual risk-free rate is 20% per year across all maturities. Use a single-step binomial tree together with the mimicking portfolio approach to compute the theoretical price of a European call option written on this stock with a strike price of t55 and exactly nine months until expiration.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section20.A: The Black-scholes Option Pricing Model

Problem 1P

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