Question
Use the following information to answer the next three questions 1. The following information is provided in the context of a two period (two six-month
Use the following information to answer the next three questions
1. The following information is provided in the context of a two period (two six-month periods) binomial option pricing model. A stock currently trades at $40 per share, and a call option on the stock has an exercise price of $38. The stock is equally likely to rise by 10% or fall by 10% during each six-month period. The one-year risk free rate is 5%.
Find the probability that the stock falls each period. Round intermediate steps and your final answer to four decimals.
.3765
.6235
.7500
.2500
2. Find the value of the American call today. Round intermediate steps and your final answer to four decimals and your final answer to two decimals.
4.68
4.57
4.46
6.14
3. Find the present value of a European call given the same information listed in question 4. Round intermediate steps to four decimals and your final answer to two decimals. Do not use the dollar sign when entering your answer.
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