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The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26.
The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume that the risk-free rate is zero. An investor sells call options with a strike price of $32. What is the risk-neutral probability of the underlying hitting $36 and what is the value of each call option?
a. 0.6 and $1.6
b. 0.6 and $3.6
c. 0.4 and $1.6
d. 0.4 and $3.6
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