Assume the following information for a stock and a European call option written on the stock...

Assume the following information for a stock and a European call option written on the stock ,Exersice price 80,current stock price 70,the variance is0.4,time to expiration 0.5 semi annum ,risk free rate of return 0.07.Detaermin the time premium using Binomial ,assume it is a two period call option.

Expert Solution

std dev = var^(1/2) = 0.4^(1/2)=63.24%

upmove u = e^(std dev*(t)^(1/2))

=e^(0.6324*(1)^(1/2))=1.882

Down move d = 1/u = 1/1.882=0.5314

Time premium = call price -max(current stock price-exercise price,0) = 23.4344-max(70-80,0) = 23.4344-0=23.4344

jeff jeffy answered 1 year ago

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