Question

You are attempting to value a call option with an exercise price of $101 and one year to expiration. The underlying stock pays no dividends, its current price is $101, and you believe it has a 50% chance of increasing to $125 and a 50% chance of decreasing to $77. The risk-free rate of interest is 11%. Calculate the call option’s value using the two-state stock price model. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Answer 1

Using excel to calculate call option value

Call option
Stock Value	101
Excerise Value	101
Risk free Rate	11%
Probability of Up	0.50
Probability of Down	0.50
			S1+	125.00
			C1+	24.00	(Max Value of (0,S1-Excerise Value)
Stock Value(S0)	101
			S1-	77.00
			C1-	0	(Max Value of (0,S1-Excerise Value)
Call option in Year 1	12.00	(Formula = 50%*C1 + 50% * C1-)
Cal option at year 0	10.81	Formula= Call option at year 1/(1+r)

Call option = 10.81

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