2.15. Use the trinomial model to value the following option. Comment on the match with the qualitative

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2.15. Use the trinomial model to value the following option. Comment on the match with the qualitative graphical solution.

You, a bookmaker, have a client, Bob, who wants to bet $100 that Telstra shares will rise to be above $5 in one year’s time. The share’s current value is $4. Suppose the interest rate for √ bonds is 10% per year, and the volatility of the shares is 20% per year. Deduce that you charge Bob at least about $20 to make this bet.

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