1. The value of an option is determined by a number of factors and these factors relates to the value of the underlying asset and the financial market.

Required:

Critically explain five determinants of the value of an option. 6 Marks

2. A call option has a strike price of 50, which is expected to expire in two time periods, on an underlying asset whose price currently is 50. Assuming that the prevailing interest rate is 11%, use the binomial option pricing model to determine the value of the option

5 Marks