Question

Suppose Shinra's stock price rises or falls with equal probability by $30 each month, starting where it ended the previous month. What is the expected benefit of a three-month at-the-money European call option on Shinra's stock if the stock is priced at $100 when the option is purchased? Enter your answer to the nearest penny (2 decimal places).

Answer 1

A European call option is only excercisable at the expiration, i.e., at the end of three months.

Value of a call option embedded stock - 100-70 = 30