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You are interested in the IFAM stocks on a stock exchange. The current price of IFAM stock is 20. The stock price is expected to
You are interested in the IFAM stocks on a stock exchange. The current price of IFAM stock is 20. The stock price is expected to either go up by 10% or down by 5% each year over the next two 1-year period. The risk-free interest rate is 8% per annum compounded annually. A broker now calls you with the following offer. You pay C0 now for the following opportunity: In one year, you can choose whether or not to buy a call option on IFAM stocks with one year maturity (i.e. expiry is two years from now). This option has an exercise price of 21, and costs 1.5. (You have an option on an option or acompound option)
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