Question

You believe that the economy will take five possible states: total bust; moderate recession; normal; good growth; boom with probability of 10% 20% 40%; 20%; 10% The stock index will take five levels under the five states: 80 90; 100; 110; 120 Q2. Consider a CALL option with strike at 105. Q2a. What is the prob of CALL expiring ITM (ie the price for the 105 strike binary call that pays $1 if expiring ITM)? Q2b. What is the expected value of underlying index price under the condition that CALL expires ITM? Q2c. What is the conditional CALL payment when expiring ITM? Q2d. How much should the CALL option be priced at today?

Answer 1