Question

You are attempting to value a call option with an exercise price of $95 and one year to expiration. The underlying stock pays no dividends, its current price is $95, and you believe it has a 50% chance of increasing to $120 and a 50% chance of decreasing to $70. The risk-free rate of interest is 8%. Based upon your assumptions, calculate your estimate of the the call option's value using the two-state stock price model. (Do not round intermediate calculations. Round your answer to 2 decimal places.)  

Value of the call            $ ?

Answer 1

Using excel to calculate option pricing  

Stock Value	95
Exercise Price(X)	95
Risk free Rate	8%
Probability of Up	0.50	(Formula = (1+Risk free rate- Down Factor)/(Up factor - Down Factor)
Probability of Down	0.50	Formula = (1-Probability of up)
			S1+	120.00	Formula = Stock Value*Up Factor
			C1+	25.00	(Max Value of (0,S1-X)
Stock Value(S0)	95
			S1-	70.00	Formula = Stock Value*Down Factor
			C1-	0	(Max Value of (0,S1-SX)
Call option in Year 1	12.50	(Formula = Probability of Up*C1 + Probability of Down * C1-)
Cal option at year 0	11.57	Formula= Call oprtion at year 1/(1+r)

Call Option = 11.57