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The current price of a stock is $48. In 1 year, the price will be either $55 or $31. The annual risk-free rate is 6.6%.
The current price of a stock is $48. In 1 year, the price will be either $55 or $31. The annual risk-free rate is 6.6%. Find the price of a call option on the stock that has a strike price of $50 and that expires in 1 year. ( Use daily compounding.)
Inputs P0 = ? u = ? X = ? d = ? Cu = ? Pu = ? Cd = ? Pd = ?
Use the Binomial Model 4-step approach | ||||
Step 1 | Ns | = | ||
Step 2 | Payoff | = | ||
Step 3 | PV(payoff) | = | ||
Step 4 | Price for N shares | = | ||
Vc | = |
Use the Binomial Model Formula Approach (single-period, thus n=1) | ||||
ert/n | = | |||
u | = | |||
d | = | |||
Vc | = |
Use the same Binomial Formula to price an option with the same chararistics but with strike price of $45. | |||||||
Cu | = | ||||||
Cd | = | ||||||
Vc | = |
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