Question
In: Finance
The current futures price of a stock is $15 per share. One month later, when the...
The current futures price of a stock is $15 per share. One month later, when the futures option expires, the futures price could have risen to $16.5 per share or declined to $14 per share. The strike price is $14.5. The risk-free rate is 6%. What is the value of long futures contract (per share) at the option maturity?
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 = 0.4301
Probabilty for Downward Movement =1 - Probabilty for upward Movement
Probabilty for Downward Movement =1 - 0.4301
Probabilty for Downward Movement = 0.5699
| 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 |
| 16.5 | 14.5 | 2 | 0.4301 | 0.860 |
| 14 | 14.5 | 0 | 0.5699 | 0 |
| 0.860 |
Expected Option Price as on Maturity = $0.860
Price of this Call Option as on Today = 
Price of this Call Option as on Today = 
Price of this Call Option as on Today = $0.856
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
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