Question

*The following information applies to the next two
questions.*

One-year interest rates are 5%. A stock currently sells for $40 and will either rise to $50 or fall to $35 in six months.

8. Using the binomial option pricing model, determine the fair value of a $45 call.

a. $1.45

b. $1.95

c. $2.75

d. $3.45

9. Using the binomial option pricing model, determine the fair value of a $45 put.

a. $3.89

b. $4.78

c. $5.86

d. $6.54

Answer #1

Use the following
information to answer the next two questions.
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