Question

The price of DEF Corp. stock is $50 per share and the call option on the...

The price of DEF Corp. stock is $50 per share and the call option on the stock has a price of $10 and an exercise price of $45, with a time to maturity of one year. Assume the risk-free rate is 6%.

  1. If the volatility of the stock is 20% during the year, use the two-state model to derive the price of the option.
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Answer #1

Solution 5.>

The price of the 2-period Call option is $8.88

I have solved this question in Excel. The formula used are shown in another excel file. 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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