Question
In: Finance
The current price of a stock is $50. In 1 year, the price will be either...
The current price of a stock is $50. In 1 year, the price will be either $65 or $35. The annual risk-free rate is 10%. Find the price of a call option on the stock that has an exercise price of $55 and that expires in 1 year. (Hint: Use daily compounding.)
Solutions
Expert Solution
Risk neutral probability = [(1+r)^n - d] / u-d
d = 35 / 50
= 0.7
u = 65 /50
= 1.30
= [ (1+0.000274)^365 - 0.7 / [ 1.30 - 0.7 ]
= [ 1.1052 - 0.7 ] / [ 1.3 - 0.7 ]
= 0.4052 / 0.6
= 0.6753
| Expected Price | Strike Price | Exercised/ Not | Vc | Prob | Expected Vc | PVF @10% | Vc Today |
| $ 65.00 | $ 55.00 | Exerceisred | $ 10.00 | 0.6753 | $ 6.75 | 0.9048 | $ 6.11 |
| $ 35.00 | $ 55.00 | Not Exercised | $ - | 0.3247 | $ - | 0.9048 | $ - |
| Value of Call Today | $ 6.11 |
Pls do rate, if the answer is correct and comment, if any further assistance is required.
jeff jeffy answered 1 year agoRelated Solutions
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