Question

The stock of Kingbird is currently trading for $40 and will either rise to $48 or fall to $32 in one month. The risk-free rate for one month is 1.5 percent. What is the value of a one-month call option with a strike price of $40? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25.)

Value of a call option is $enter the dollar value of the call option rounded to 2 decimal places  .

Answer 1

Grinen Calculation of Value of Ane Manth Call option Stock Current price: $40 (Spot Rate) One Manth Risk free Rate = 1.5% (3) Expected Price of Stock at maturity (after one month - may be $ 48 car $ 32 ist we will Calculate Pralealeility (P) of Value a of Stock goes up to $ 40 p = I-d U- Here I= Risk free Rate (1.015) d = Douenside Value of Stock (4) U = Upside Value of Stock (90)

P = 1.015 - 32 y = 5375 . So I-P .4625 (1-.5375)

Now Strike price of $40 Expected Value of Coll with at maturity Stock Price Strike Price IF Value of Call (Stock Price -Strike, at maturity Price $ 8 (48-40, 0) $ 98 $ 40 $32 $ 40 (optian lapse. 32-40, 0) Nowe Value of Caft captian = Upside Value of XP + douenside Value x (1-P) - Call option of Call option - 1 + Risk free Rate 0 .4625 $8 x - 5375 + I+.015 $ 4.24 So, Value of a One Manth Call ceptian is $4.24.