Question
In: Finance
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 = 
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 | A*B | ||
| 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 = 
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 agoRelated Solutions
A call option with an exercise price of $110 has six months to the expiration date....
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