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A stock is currently at $30. Over each of the next two three-months periods, the stock...

A stock is currently at $30. Over each of the next two three-months periods, the stock may move up to a factor 1.20 or down by a factor of 0.80 each period. A call option with strike price of $32 and maturity of six months is available. The current risk-free rate is 4% per year. Is the call option in the money, at money, or out of money. Explain. Find the value of this call option using the binomial tree approach. Find the value of a put option with same strike price and maturity (using either the binomial tree approach or put-call parity to find the put value). Is the put option in the money? Explain. Find the time value of this put option.

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Expert Solution

Call option is out of money as strike price is more than current share price

For more clarity if above image is not clear

Time value = Call value -intrinsic value = 3.0273-max(30-32,0)=3.0273

Put option is in the of money as strike price is more than current share price

For more clarity if above image is not clear

Time value = Call value -intrinsic value = 4.3937-max(32-30,0)=4.3937-2 =2.3937

jeff jeffy answered 1 year ago
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