The common stock of DATS Limited has a present market price per share of $50. A 6- month call option has been written on the stock with an exercise price of $55. Presently the option has a market value of $10. At the end of 6 months, you estimate the market price of the stock to be $45 per share with a probability of .1, $48 with a probability of .2, $60 with a probability of .4, $70 with a probability of .2, and $80 with a probability of .1.

Required:

a. What is the expected value of share price 6 months hence? What is the expiration value of the option if that expected value of share price should prevail? (3 marks)

b. What is the expected value of option price at expiration; assume that the option is held to this time? Why does it differ from the option value determined in part a? (3 marks)

c. Presently, what is the theoretical value of the option? Why does it have a positive value? (4 marks