Question

Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent. The risk-free rate is 4 percent. Assume a one-period world. Answer questions 12 through 15 about a call with an exercise price of 80.What is the current value of the call?2 period (please show your work )
a. 8.00
b. 7.30
c. 11.13
d. 0.619
e. none of the above

Answer 1

e. none of the above

p move Value 1.10 Down move Value 0.92 88 80*1.1 Stock Price for up move 8 -MAX(0,88-80) Call Option Value 80 73.6 80*0.92 Stock Price for Down move 0 -MAX(0,73.6-80) Call Option Value Risk Nuetral Proba bilty of UP move-((1+4%)-0.92)/(1.1-0.92) 0.667 Risk Nuetral Probabilty of Down move 1-0.6667 0.333 Expected Value of Call Option in 1 Year-0.667 "8 5.333333 Value of the option Today 5.33/(1+4%) 5.128205