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The current share price of Verafon plc is 230 pence. Over the coming year, the share price is expected to either rise or fall by
The current share price of Verafon plc is 230 pence. Over the coming year, the share price is expected to either rise or fall by 60%. The two outcomes have equal probabilities. The risk-free interest rate is 4.5%. (i) Using the binomial option pricing model, what is the value of a call option on Verafon with an exercise price of 220 pence? (ii) What is the exercise (i.e. intrinsic) value of the option? (iii) What is the premium (i.e. time value) of the Verafon option?
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