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The current price of Rock Pound Corporation stock is $10. In the next year, this stock...

The current price of Rock Pound Corporation stock is $10. In the next year, this stock price can either increase by 20% or decrease by 10% every six months. Rock Pound pays no dividends. The effective semi-annual risk free interest rate is 2%, which will remain constant forever. Using the risk neutral binomial model, calculate the price of a one-year European call option on Rock Pound stock with a strike price of $10

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Answer #1

Answer: The value of call with the strike price of $10 will be $1.0452.

To solve this we will use two step Binomial Model of option pricing.

The solution is given below:

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