The current price of MB Industries stock is $20 per share. In the next year the...

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)?

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Expert Solution

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.

jeff jeffy answered 1 year ago

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