Question

You work on a proprietary trading desk of a large investment bank, and you have been asked for a quote on the sale of a call option with a strike price of $49 and one year of expiration. The call option would be written on a stock that does not pay a dividend. From your analysis, you expect that the stock will either increase to $71 or decrease to $33 over the next year. The current price of the underlying stock is $49, and the risk-free interest rate is 4% per annum. What is this fair market value for the call option under these conditions? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Curment rice Slock's = 49 strike price = 4. P.a Risk free rate T= Matority periad = 1 the föllowing have Bironial fromowork we call pey aneler Ae and medel Stock price (5-k,0) Coll payots (1 - 4a)" 49 (39 - wn)" = 0 33 Tinar: o yr. yr fautor u- up Step %3D 49 d- down 33 49 2= Risk neutred e - d = 0. 4a 367 up step proboatrity= we know, discounted the is qual to derivetiu. price risk oy is expected paygozą under the Volue apprach. neutral call aption price (xe- E (poyott cal

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