Question

Problem 24-5 Calculating Option Values (LO2] The price of Cilantro, Inc., stock will be either $75 or $97 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 7 percent. a. Suppose the current price of the company's stock is $86. What is the value of the call option if the exercise price is $71 per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Suppose the current price of the company's stock is $86. What is the value of the call option if the exercise price is $81 per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) & Answer is not complete. a. Call value $ 19.80 b. Call value

Answer 1

Date Page Sol of Prio Problem 24.5 - Applying Binomial Model - us=97 us=97 Cu=26 - E= F So=86 < -0.23 ds=75 Cd = 0 t = u= lyr us So = 1.12 9 7 = 86 79 d= dS z So 75 86 0.8721 R = 1.o [ T- bills yield ] p = Rod = 0.77 ²1.07-0.872) 1.1279 - 0.8721 und Value of an option today = pv of Expected pay off das discounted at Rf

? Co = p Cut Co-p) Cd - R -0.77 26 +0.23 40 l»DZ @ Value of call option Cco) =$18.71 us=9 7 Cu=16 So=86 2 1-P = 0.23 ds=75 Cd = 0 . Co= 0,77 X 16+ 0.234D = 11:51 @ Value of Call option {Co) = $11:51 Note: p = probability of attaining maximum price ieus ef Cu = Payoff of Call upside Cd = Pay off of Call downside