A call option with an exercise price of $110 has six months to the expiration date....

A call option with an exercise price of $110 has six months to the expiration date.
Currently, the stock is sold at a price of $120. At the expiration date, the underlying stock has
two possible ending prices: $150 or $105. The risk-free rate of return is 8 percent per annum.
Calculate the price of this call option using binomial option pricing model.

Solutions

Expert Solution

Solution:-

Assume their is Continuous Compounding method use.

First we need to Find Probability-

Probabilty for upward Movement =

Probabilty for upward Movement = 0.4422

Probabilty for Downward Movement =1 - Probabilty for upward Movement

Probabilty for Downward Movement =1 - 0.4422

Probabilty for Downward Movement = 0.5578

Option Price of call as on Today

		A	B	*AB**
Current Market Price as on Expiry	Excersice Price	Option Price as on Expiry	Probability	Expected Option price as on expiry
150	110	40	0.4422	17.688
105	110	0	0.5578	0

				17.688

Price of this Call Option =

Price of this Call Option = $17

If you have any query related to question then feel free to ask me in a comment.Thanks.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

A call option with an exercise price of $110 has six months to the expiration date....

A call option with an exercise price of $110 has six months to the expiration date. Currently, the stock is sold at a price of $120. At the expiration date, the underlying stock has two possible ending prices: $150 or $105. The risk-free rate of return is 8 percent per annum. Calculate the price of this call option using binomial option pricing model. (Hint: You can use any of the two methods of your preference)

A call option with an exercise price of $25 and four months to expiration has a...

A call option with an exercise price of $25 and four months to expiration has a price of $2.75. The stock is currently priced at $23.80, and the risk-free rate is 2.5 percent per year, compounded continuously. What is the price of a put option with the same exercise price?

Consider a call option with an exercise price of $110 and one year to expiration. The...

Consider a call option with an exercise price of $110 and one year to expiration. The underlying stock pays no dividends, its current price is $110, and you believe it has a 50% chance of increasing to $120 and a 50% chance of decreasing to $100. The risk-free rate of interest is 10% What is the hedge ratio? What is the value of the riskless (perfectly hedged) portfolio one year from now? What is the value of the call option...

. A stock sells for $110. A call option on the stock has an exercise price...

. A stock sells for $110. A call option on the stock has an exercise price of $105 and expires in 43 days. If the interest rate is 0.11 and the standard deviation of the stock’s return is 0.25. a) Calculate the call using the Black-Scholes model b) What would be the price of a put with an exercise price of $140 and the same time until expiration? c) How does an increase in the volatility and interest rate changes...

A stock sells for $110. A call option on the stock has exercise price of $105...

A stock sells for $110. A call option on the stock has exercise price of $105 and expires in 43 days. Assume that the interest rate is 0.11 and the standard deviation of the stock’s return is 0.25. What is the call price according to the black-Scholes model?

A stock sells for $110.A call option on the stock has an exercise price of $105...

A stock sells for $110.A call option on the stock has an exercise price of $105 and expires in 43 days.Assume that the interest rate is 0.11 and the standard deviation of the stock's return is 0.25 Required: What is the call price according to the Black Scholes model?

Suppose option prices for a Dec. 31 expiration and an exercise price of 2300 are Call...

Suppose option prices for a Dec. 31 expiration and an exercise price of 2300 are Call = 586 and Put = 386. Option prices for a Dec. 31 expiration and an exercise price of 2700 are Call = 426 and Put = 626. You believe the market has overestimated volatility in the S&P 500 index. Construct a synthetic ‘short straddle’ in which you will have a profit with small changes in the S&P 500 index and a loss with large changes...

A call option on Jupiter Motors stock with an exercise price of $80.00 and one-year expiration...

A call option on Jupiter Motors stock with an exercise price of $80.00 and one-year expiration is selling at $7.48. A put option on Jupiter stock with an exercise price of $80.00 and one-year expiration is selling at $9.12. If the risk-free rate is 3% and Jupiter pays no dividends, what should the stock price be? (Do not round intermediate calculations. Round your answer to 2 decimal places.; Use CONTINUOUS COMPOUNDING) Stock price $ ------------------------------------------------------------------------------------------------------------ You are attempting to...

Suppose you write a May expiration call option on Delta Airlines with exercise price $50 and...

Suppose you write a May expiration call option on Delta Airlines with exercise price $50 and at the same time, write a Delta Airline put option with exercise price $50. The premium of the call option is $0.91 and the premium of the put option is $0.54. Assume Delta Airlines will not pay any dividend before these options expire in May. a. Draw the payoff of this option portfolio at option expiration as a function of Delta Airlines stock price...

The price of a European call that expires in six months and has a strike price...

The price of a European call that expires in six months and has a strike price of $28 is $1. The underlying stock price is $27, and a dividend of $0.50 is expected in two months and again in five months. The continuously compounded interest rate is 10%. What is the price of a European put option that expires in six months and has a strike price of $28? Explain the arbitrage opportunities in the earlier problem if the European...

Subjects