Question

The current price of a stock is $32, and at the end of one year its...

The current price of a stock is $32, and at the end of one year its price will be either $37 or $27. The annual risk-free rate is 5%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $32, is available. Based on the binomial model, what is the option's value?

a.

$3.286
b.

$4.108
c.

$3.158
d.

$5.363
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Answer #1

Correct Option : c.#3.158

Explanation:

Effective interest rate = (1+0.05/365)^365-1

=5.1267%

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