A call option on ABC Inc. has a strike price of $25, a bid price of...

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A call option on ABC Inc. has a strike price of $25, a bid price of...

A call option on ABC Inc. has a strike price of $25, a bid price of $0.20 and ask price of $0.25. The current share price is $24.25. If the future share price of ABC could be either $22 or $35, and the current risk-free rate is 5%, what is the value of this call option?

$0.20

$3.75

$0.50

$2.90

$2.54

business finance

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Answer 1

Answer #1

STEP 1: CALCULATE THE PROBABILITY OF PRICE GOING UPSIDE (PU). PU = Stock price*(1+rf) - Lower Price / Upper price - Lower Pri

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Answer 2

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