High price=Current price*up move=22*1.18=25.96 | ||||||
Low price=Current price*down move=22*0.82=18.04 | ||||||
Risk neutral probability for up move | ||||||
q = (e^(risk free rate*time)-D)/(U-D) | ||||||
=(e^(0.09*1)-0.82)/(1.18-0.82)=0.7616 | ||||||
Call option payoff at high price (payoff H) | ||||||
=Max(High price-strike price,0) | ||||||
=Max(25.96-22,0) | ||||||
=Max(3.96,0) | ||||||
=3.96 | ||||||
Call option payoff at low price (Payoff L) | ||||||
=Max(Low price-strike price,0) | ||||||
=Max(18.04-22,0) | ||||||
=Max(-3.96,0) | ||||||
=0 | ||||||
Price of call option = e^(-r*t)*(q*Payoff H+(1-q)*Payoff L) | ||||||
=e^(-0.09*1)*(0.761595*3.96+(1-0.761595)*0) | ||||||
=2.76 |
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