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ABC stock currently sells for Rs 50 per share. One-year from now the stock will be worth either Rs 45 or Rs 55. A one-year
ABC stock currently sells for Rs 50 per share. One-year from now the stock will be worth either Rs 45 or Rs 55. A one-year call option on this stock with exercise price of Rs 50 is available now. Short-term risk-free rate of interest is 5 percent per annum. Use one-period binomial model.
a. What would be the call's price if the stock goes up and down?
b. What would be the probability of rise?
c. What is the theoretical value of the call option?
d. Suggest your investment strategy, if the call is trading at Rs 5 per share in the market.
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