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et the present price (in dollars) of a stock be S(0) = $100 per share. Suppose...

et the present price (in dollars) of a stock be S(0) = $100 per share. Suppose its price after time T will be either S(T ) = $110 or $90. (i) Suppose that the risk-free return from time 0 to T is 8%. Find the cost of the call option for the stock with strike price $108 and exercise time T. (ii) Suppose that the risk-free return from time 0 to T is 5%. Find the cost of the call option for the stock with strike price $108 and exercise time T.

Solutions

Expert Solution

For calculating the value of option we use the binomial model of option pricing

Accordingly we will find out the probability and calculate the price of the option by discounting the payoffs in two legs.

Price of the option when risk free rate is 8% is 1.667

Price of the option when risk free rate is 5% is 0.9529$.

jeff jeffy answered 1 year ago
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