Let S = $70, r = 4% (continuously compounded), d = 3%, s = 40%, T = 1.5. In this situation, the appropriate values of u and d are 1.42463 and 0.71255, respectively. Using a 2-step binomial tree, calculate the value of a $60-strike European call option.

Option D is correct, but how? Can you provide solution for Excel? formulas and steps or actual excel work sheet?

Answers:

a. $18.875

b. $18.496

c. $19.450

d. $18.317

e. $15.930