Question

An asset’s price is $41.14 and its volatility is 26% per year. A European call on the asset has nine months until expiration, a strike price of $40.00, and the risk-free interest rate is 2.6% per year. According to a two-period binomial option pricing model, what is the option’s value?

1)

$3.88

2)

$5.51

3)

$3.47

4)

$4.47

5)

$4.89

Answer 1

So Price of call option is $ 5.51. In second page, Cu represents price of call option on upmove. Cd represents price of call option on downmove. P0 represents price of call option.