In: Finance
The current price of MB Industries stock is $20 per share. In the next year the stock price will either go up to $24 per share or go down to $16 per share. MB pays no dividends. The one year risk-free rate is 5 percent and will remain constant. Using the one-step binomial pricing model, what is the price of a one-year CALL option on MB stock with a strike price of $20 (out to two decimal places)?
Please refer to below spreadsheet for calculation and answer. Cell reference also provided.
Cell reference -
Please note: continuous compounding used in above calculation if you use annual compounding then answer would be slight different.