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What is the value of the option? If a binary option pays off R150 if a...

What is the value of the option? If a binary option pays off R150 if a stock price is greater than R40 in three months. The current stock price is R35 and its vootalitu is 35%.The risk free rate is 4 % and the expected return of the stock is 10%.

Secondly what is the Real - world probability that the payoff will be received?

Solutions

Expert Solution

By Using Black -Scholes Formula , Call Option Price =

= ​C=StN(d1​)−Ke−rtN(d2​)

​where :

C=Call option price

S=Current stock = R35

K=Strike price = R40

r=Risk-free interest rate = 4%

t=Time to maturity = 3 MONTHS

N=A normal distribution​

Solving the Equation we ll get Option Price = R0.92

jeff jeffy answered 2 years ago
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