Q1. You believe stock price by year end will have the following multinomial distribution (15 points):

Price Probability

60 10%

80 20%

100 40%

120 20%

140 10%

Q1a. What should be the stock price TODAY? (3 points)

Q1b. what is the prob that a 110 strike CALL will expire ITM? (3 points)

Q1c. what is the conditional average price of underlying stock when 110 strike CALL expires ITM? (3 points)

Q1d. what is the conditional average payment from the 110 strike CALL option when the CALL expires ITM? (3 points)

Q1f. based on Q1b-Q1d, how much should the 110 CALL be priced at? (3 points)

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Q2. Underlying priced at 200 with MAD of 40. (15 points)

Q2a. What is the probability of option expiring ITM for a 160 CALL? (3 points)

Q2b. What is the average underlying price when CALL expires ITM? (3 points)

Q2c. How much should the 160 CALL be priced at? (3 points)

Q2d. Out of the price in Q2c, how much of that is intrinsic value and how much is time value? (3 points) Hint: intrinsic value is the value of option if option expires NOW. Time value is the remaining.