Question
t is 1:32pm Friday December 10 th 2021 and the current price of NIO stock is $33.95. You estimate that, seven days from now (December
t is 1:32pm Friday December 10th 2021 and the current price of NIO stock is $33.95. You estimate that, seven days from now (December 17th), the stock price will either gain $2.05 or lose $1.95. The stock pays no dividends. The risk-free interest rate for this seven day period is zero. Using the binomial pricing model, calculate the price of a seven-day call option on NIO stock with a strike price of 34 by taking the following steps.
a.) Indicate the payoffs on the stock, bond, and call in one week. Assume bonds have face value of $1.
Now | One week from now | |||||
Stock | Bond | Call |
| Stock | Bond | Call (K=34) |
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| Up state: |
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$33.95 | $1 | ? |
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|
|
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| Down state: |
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b.) Write the two equations in two unknowns that are to be solved. Solve for the number of stocks, D, and the number of bonds, B.
c.) Compute the value of the call.
d.) Compare the value computed in part c. to the market price of the call
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