Question

A stock is currently priced at $47.00 and pays a dividend yield of 3.7% per annum. The risk-free rate is 5.3% per annum with continuous compounding. In 18 months, the stock price will be either $40.89 or $52.64. Using the binomial tree model, compute the price of a 18 month European call with strike price $48.74.

Answer 1

Dato- Pade alacto Notation value $40.89 - Spet Reise 12EP $98.04 - Exercice faire oth - lower Crnind Expected Future Cat Perice - Expected Future Spot ferice Upper limit the $52.64 s Value of a Coll at a lower Concit o s alistadas Action & lapse, linee ff, < C. Therefore volere in Nit ca mer - value of a call at upper leil 2 Action & Enercise, since Ffo > EP. Therefore raku is Fly - El a $59.66 $40.74 soit la wall 888 - Extent of lower comit of Futine Got leice ve FP on current pere (le FP, /slo icou oddvit $90185/847 d 8.87. - Extent of Upper limit of Future Sput flice [Fl] Lon Current feice (6], FP /slo - $59.64/847 u 1112 32 - Risk Free Pate of beturn Tenor of optron Contrast in years le monthe/ 12 months - Inture value factor [Continous Compounday] f © Computer toe of lower Cont LELE 54- $1.12-1.08.25 $1.12. - 8.82 . ro4 2 25 16

probability of higher liurt (Fl) 1-16 LZ 084 Nolene of option Prefent value of Colla Future Value it 2 43.98.84 e $3.03