Question

12. One-Period Binomial Option Pricing (L01, CFA2) A stock is currently priced at $74 and will move up by a factor of 1.20 or down by a factor of 0.80 over the next per The risk-free rate of interest is 4.2 percent. What is the value of a call option wi price of $75?

Is my work done correctly:

S_u = 74 * 1.2 = 88.8

S_d = 74 * .8 = 59.2

C_u = 88.8 – 75 =13.8

C_d = 59.2 – 75 = 0

Change = (13.8 – 0) / (88.8 – 59.2) = 0.4662

C = (.4462 * 74(1 + .042 – 1.2) + 13.8) / 1.042

C = 8.24

$8.24 is the price of the call option

Answer 1

P 74x12= 88-9 (= 1333 k= 75 74 < In 7ux 0-8 = 59.20 cd=0 P=ert - d U d - e042X1 -0.80 = 0.60724 1. 20-0.80 Call value = P x Cu + (1-P) (Ca) ert => 0.60724 X 13.8 e-04281 - 8.37991 100 4 289 = 8003520 ~ 8004 Ans