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currently, a call option on Bayou stock is available with an exercise price of $100 and...

currently, a call option on Bayou stock is available with an exercise price of $100 and an expiration date one year from now. Assume that the price of Bayou corporation stock today is $100. Furthermore, it is estimated that Bayou stock will be selling for either $75 or $143 in one year. Also, assume that the annual risk-free interest rate on a one year Treasury bill is 10 percent, continuously compounded. Therefore, the T-bill will pay $100 x e^(0.1), or $110.25.

Find the call option premium using the Binomial model.

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Answer #1

Solution.>

The premium of the call option is $20.322

I have solved it in Excel. If you still have any doubt, kindly ask in the comment section.

The formula used are:

Note: Give it a thumbs up if it helps! Thanks in advance!

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