Question

1. Consider a stock which trades for $50 (S₀ = 50). Consider also a European call option with an exercise price of $50 which expires in one year. The risk free rate is 5% cc. Suppose that you calculate the risk-neutral probability of an upward move to be 0.5064.    What is the fair price of the option, based on a two-period binomial model?   Choose the closest answer.

A)5.28

B)5.84

C)6.45

D)13.05

2. Consider a stock which trades for $50 (S₀ = 50). Consider also a European put option with an exercise price of $50 which expires in one year. The risk free rate is 5% cc. Suppose that you calculate the risk-neutral probability of an upward move to be 0.5064. What is the fair price of the option, based on a two-period binomial model?   Choose the closest answer.

A)4.01

B)4.60

C)5.28

D)5.84

Answer 1

Current price S	50
European call option
Exercise price	50
Time	1year
Probablity of upward movement u=	0.5064
Find fair price of the option - Exercise price - X - 50
pi	0.5064
two period binomial - 1/2	0.5	years
					1.5064
S=	50
At the end of 2 years	12.82205
C	6.493085	6.183891
	1.05
P	6.328963	6.027584
	1.05