Question
A non-dividend paying stock currently trades at a price of $25. European and American call and put options on the stock with a time to
A non-dividend paying stock currently trades at a price of $25. European and American call and put options on the stock with a time to expiration of 180 days have an exercise price of $26. You forecast that the stock price can go up 5% or down 4% in each period of length 90 days each. The annually compounded risk free rate is 3%. Use the two-period BOPM. Use this information to answer this and the next 5 questions. The risk-neutral probability that the stock price will go down in each period of length 90 days is closest to:
a. 0.5256
b. 0.2222
c. 0.4744
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