Question

The one year call option on Caddo Inc. stock has an exercise price of 45. The...

The one year call option on Caddo Inc. stock has an exercise price of 45. The current value of Caddo is 46. On the maturity date, the value of Caddo will be either 51 or 43. The risk free rate is 5%. Use the binomial option pricing model to find a fair value for the call option.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Probability for the Higher Price:

CMV = Current market value as on today

i = interest rate

Probability for the price-51 :

Therefore Probability for the price-43 = 1 - 0.6625

= 0.3375

Value of Call Option at maturity date:

(i) If price will be 51:

Value of call option = Market Value - Exercise Price

= 51 - 45

= 6

(ii) If price will be 43:

Value of call option = Market Value - Exercise Price

= 43 - 45

= 0 [Value can not be negative]

Fair Value of Call Option as on today:

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The one year call option on Caddo Inc. stock has an exercise price of 45. The...
The one year call option on Caddo Inc. stock has an exercise price of 45. The current value of Caddo is 46. On the maturity date, the value of Caddo will be either 51 or 43. The risk free rate is 3%. Use the binomial option pricing model to find a fair value for the call option.
You are attempting to value a call option with an exercise price of $150 and one...
You are attempting to value a call option with an exercise price of $150 and one year to expiration. The underlying stock pays no dividends. Its current price is $100. The stock price either increases by a factor of 1.5, or decreases by a factor of 0.5, every six months. The risk-free rate of interest is 2% per year (or 1% per six-month period). What is the value of this call option using the two-period binomial option pricing model? (Do...
A call option with an exercise price of $110 has six months to the expiration date....
A call option with an exercise price of $110 has six months to the expiration date. Currently, the stock is sold at a price of $120. At the expiration date, the underlying stock has two possible ending prices: $150 or $105. The risk-free rate of return is 8 percent per annum. Calculate the price of this call option using binomial option pricing model.
currently, a call option on Bayou stock is available with an exercise price of $100 and...
currently, a call option on Bayou stock is available with an exercise price of $100 and an expiration date one year from now. Assume that the price of Bayou corporation stock today is $100. Furthermore, it is estimated that Bayou stock will be selling for either $75 or $143 in one year. Also, assume that the annual risk-free interest rate on a one year Treasury bill is 10 percent, continuously compounded. Therefore, the T-bill will pay $100 x e^(0.1), or...
Currently, a call option on Bayou stock is available with an exercise price of $100 and...
Currently, a call option on Bayou stock is available with an exercise price of $100 and an expiration date one year from now. Assume that the price of Bayou Corporation stock today is $100. Furthermore, it is estimated that Bayou stock will be selling for either $62 or $152 in one year. Also, assume that the annual risk-free interest rate on a one-year Treasury bill is 10 percent, continuously compounded. Therefore, the T-bill will pay $100 × e^(0.1), or $110.25....
You are attempting to value a call option with an exercise price of $55 and one...
You are attempting to value a call option with an exercise price of $55 and one year to expiration. The underlying stock pays no dividends, its current price is $55, and you believe it has a 50% chance of increasing to $85 and a 50% chance of decreasing to $25. The risk-free rate of interest is 6%. 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...
The price of DEF Corp. stock is $50 per share and the call option on the...
The price of DEF Corp. stock is $50 per share and the call option on the stock has a price of $10 and an exercise price of $45, with a time to maturity of one year. Assume the risk-free rate is 6%. If the volatility of the stock is 20% during the year, use the two-state model to derive the price of the option.
3) For a call option on a non dividend paying stock the stock price is $30,...
3) For a call option on a non dividend paying stock the stock price is $30, the strike price is $20, the risk free rate is 6% per annum, the volatility is 20% per annum    and the time to maturity is 3 months. Use the Binomial model to find:             a) The price of the call option? Can you show the binomial model please
1- A one-year European call option on Stanley Industries stock with a strike price of $55...
1- A one-year European call option on Stanley Industries stock with a strike price of $55 is currently trading for $75 per share. The stock pays no dividends. A one-year European put option on the stock with a strike price of $55 is currently trading for $100. If the risk-free interest rate is 10 percent per year, then what is the current price on one share of Stanley stock assuming no arbitrage? 2- The current price of MB Industries stock...
Question 34 Black-Scholes Option-Pricing S 45 Current stock price X 50 Exercise price r 5.00% Risk-free...
Question 34 Black-Scholes Option-Pricing S 45 Current stock price X 50 Exercise price r 5.00% Risk-free rate of interest T 9 months Time to maturity of option Variance 6.308% Stock volatility 1. Call option price = 4.63 2. Call option price = 2.83 3. Call option price = 2.93 4. Call option price = 2.63 5. None of Above
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT