In: Finance
The closing stock price of Apple yesterday is $106/share. On each of the next two days (today and tomorrow), its price will either increase by 1% or decrease by 1%. The risk-free interest rate is 0.01% per day. Right after the closing of the NYSE yesterday, you decided to buy European call options written on Apple’s stock with exercise price of $106. The options will expire in two days (at the end of tomorrow). What should be the value of the options? Calculate the value using both the binomial tree method and the risk-neutral probability method.