Today 12 months from today 6 months from today 1.) 5 = .:) A.) 555 SE C 5 F.) A 8 C D E F Stock price (5) Call option price [f] Value of call option at node B = Value of cell option at node C Value of call option today lode A) - D The price of a stock is currently $50 The risk-free rate is 4% (per annum) You want to value a call option expiring in 6 months with an exercise price of $49 In each of the next (two) 3 month periods the stock will rise or fall by 15% u= _(1+rise) -> (1+15%) -> 1.15 d = _(1-fall) ->(1-.15%) ->.85 Compute the probability of an up move and a down move in the stock ert d P(u) u- P(u) = (e04(8/12)-85)/(1.15-.85)=.5335 o P(d) = 1-53.35%= .4665 Today 12 months from today 6 months from today 1.) 5 = .:) A.) 555 SE C 5 F.) A 8 C D E F Stock price (5) Call option price [f] Value of call option at node B = Value of cell option at node C Value of call option today lode A) - D The price of a stock is currently $50 The risk-free rate is 4% (per annum) You want to value a call option expiring in 6 months with an exercise price of $49 In each of the next (two) 3 month periods the stock will rise or fall by 15% u= _(1+rise) -> (1+15%) -> 1.15 d = _(1-fall) ->(1-.15%) ->.85 Compute the probability of an up move and a down move in the stock ert d P(u) u- P(u) = (e04(8/12)-85)/(1.15-.85)=.5335 o P(d) = 1-53.35%= .4665