Question

1) Consider a one-period binomial model of 12 months. Assume the stock price is $54.00,
σ = 0.25, r = 0.04 and the exercise price of a call option is $55. What is the forecasted price of the stock given an upward movement during the year?

2) Consider a one-period binomial model of 12 months. Assume the stock price is $54.00,
σ = 0.25, r = 0.04 and the exercise price of a call option is $55. What is the forecasted price of the stock given a downward movement during the year?

Answer 1

EXp = Exponential Value

1. Forecasted price in upward movement = Current Stock Price * EXP(Volatility * time) * EXP(Risk Free Rate * Year)

Forecasted price in upward movement = 54 * EXP(0.25 * 1) * EXP(0.04 * 1)

Forecasted price in upward movement = 54 * 1.284025 * 1.040811

Forecasted price in upward movement = $72.17

2. Forecasted Price in Downward movement = Current Stock Price / EXP(Volatility * time) * EXP(Risk Free Rate * Year)

Forecasted Price in Downward movement = [$54 / EXP(0.25 * 1)] * EXP(0.04 * 1)

Forecasted Price in Downward movement = [$54 / 1..284025] * 1.040811

Forecasted Price in Downward movement = $43.77

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