Question
The current stock price of Merton Corp. is $20. The stock price could go up to $30 or down to $15 in the next year
The current stock price of Merton Corp. is $20. The stock price could go up to $30 or down to $15 in the next year (no dividends). The one-year risk free rate is 3%. Consider a one-year call option on Merton stock with a strike price of $26.
a. What is the value of the call option on the expiration day if the stock price goes up to $30?
b. What is the value of the call option on the expiration day if the stock price goes down to $15?
c. Using the Binomial Tree Model, calculate the current price of the call option.
d. What is the current price of the identical put option?
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