Question

A stock price is currently priced at $65 and after one year it can go up...

A stock price is currently priced at $65 and after one year it can go up 30% or down 22%. The risk-free rate is 8% per annum with continuous compounding. The price of price of a one-year European call option with strike price of $70 is:

Select one:

a. $7.81

b. $7.65

c. $7.83

d. None of the answers provided is correct.

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Homework Answers

Answer #1

Solution-

First we need to Find Probability-

Probabilty for upward Movement =

Probabilty for upward Movement =

Probabilty for upward Movement in = 0.5832

Probabilty for Downward Movement =1 - Probabilty for upward Movement

Probabilty for Downward Movement =1 - 0.5832

Probabilty for Downward Movement = 0.4168

Option Price of call as on Today
A B A*B
Current Market Price as on Expiry Strike Price Option Price as on Expiry Probability Expected Option price as on expiry
84.5 70 14.5 0.5832 8.456
50.7 70 0 0.4168 0.000
8.456

Call Option Price as on Today =

Call Option Price as on Today = $7.81

The correct Answer is point A i.e. $7.81.

If you have any query related to question then feel free to ask me in a comment.Thanks. Please rate.

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