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QUESTION 18 The current price of a stock is $22, and at the end of one year its price will be either $30 or $13.

QUESTION 18

  1. The current price of a stock is $22, and at the end of one year its price will be either $30 or $13. The annual risk-free rate is 4.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $25, is available. Based on the binomial model, what is the option's value? (Hint: Use daily compounding.)

    a.

    $1.70
    b.

    $2.79
    c.

    $3.29
    d.

    $2.43
    e.

    $3.62

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