Question

A call option on a stock is trading for $30 per share with a $32 exercise price. The stock's standard deviation is 36% per year; the option matures in 6 months; and the risk-free interest rate is 4% per year.

            a) Find the risk neutral probability assuming 3 months for each step.

            b) Find the call price

            c) Find the put price?

Answer 1

u= e^(Standard deviation)*( Time each period/12)^0.5

=e^(0.36)*(3/12)^0.5

=1.1972

d=1/u= 0.8352

a. 0.4830

B.

C. 1. If its European Put option.

2. If its American Put option.