A stock is currently priced at $100. Over each of the next two three month periods...

A stock is currently priced at $100. Over each of the next two three month periods it is expected to increase by 10% or fall by 10%. Consider a six month call option with a strike of $95. The risk free rate is 8% per annum.

What is the risk neutral probability p?

MC Options: A. 0.601 B. 0.399 C. 0.65 D. 0.55

What is the call price?

MC Options: A. 10.87 B. 11.55 C. 9.00 D. 8.60

Solutions

Expert Solution

Risk neutal probability p means what is the probability of the spot price to go in the up ward direction.

Call option calue will be calculated by 2- period binomial model of option pricing.

Risk Neutral Probability p = 0.601

Option A. 0.601

Call Price = $10.8664

Option A. 10.87

jeff jeffy answered 1 year ago

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