High price=Current price*up move=23*1.19=27.37 | ||||||
Low price=Current price*down move=23*0.81=18.63 | ||||||
Risk neutral probability for up move | ||||||
q = (e^(risk free rate*time)-D)/(U-D) | ||||||
=(e^(0.07*1)-0.81)/(1.19-0.81)=0.69081 | ||||||
Call option payoff at high price (payoff H) | ||||||
=Max(High price-strike price,0) | ||||||
=Max(27.37-23,0) | ||||||
=Max(4.37,0) | ||||||
=4.37 | ||||||
Call option payoff at low price (Payoff L) | ||||||
=Max(Low price-strike price,0) | ||||||
=Max(18.63-23,0) | ||||||
=Max(-4.37,0) | ||||||
=0 | ||||||
Price of call option = e^(-r*t)*(q*Payoff H+(1-q)*Payoff L) | ||||||
=e^(-0.07*1)*(0.690811*4.37+(1-0.690811)*0) | ||||||
=2.81 |
(please show all work) The current price of Estelle Corporation stock is $23.00. In each of...
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